Enter the total cost of the most recent units put in inventory and the total number of units sold in the time period to calculate the COGS using LIFO.
The following formula is used to calculate the COGS using LIFO.
COGS = CU * US
- Where COGS is the cost of goods sold ($)
- CU is the cost per unit of the most recent units added to inventory ($/unit)
- US is the total number of units sold (units)
To calculate the cost of goods sold using the LIFO method, multiply the cost per unit of the most recent items added to inventory by the total number of units sold.
What is LIFO?
LIFO stands for last-in, first-out. It’s a method of accounting used in businesses where the most recent cost (last-in) of inventory is used as the cost basis for the most recent sold (first-out) units of a good.
For example, if a business owner stores inventory every month, and the first month he adds inventory at a cost of $50.00, but then in the current month the cost went up to $100.00/ea, then they would use $100.00 as the cost basis for any units sold that month.
This reduces the total profit realized for that month, but it will reduce taxes.
LIFO Example Problem
How to calculate COGS from LIFO?
- First, determine the most recent cost per unit of inventory.
In this example, a business owner typically stocks a product at a cost of $45/ea, however, this month the price went up to $50/ea. So, $50 should be used as the most recent cost per unit.
- Next, determine the total number of units sold this month.
The business owner stocked 100 goods this month but only sold 80.
- Finally, calculate the COGS using the LIFO method.
Using the formula above, the cost of goods sold is calculated as:
COGS = CU*US
COGS = $50*$80
COGS = $4,500.00