Last In, First Out (LIFO)

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What is last in, first out (lifo)?

Last In, First Out (LIFO) is an inventory valuation method in which the last items added to inventory are the first ones sold. In other words, the most recently acquired items are the first ones to be sold or used.

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Image showing the meaning of last in first out (LIFO)

This method is used to manage inventory, and it is based on the assumption that the most recent items added to inventory are the most likely to be sold or used first.

LIFO is often used to manage inventory in industries with rapidly changing prices, such as the retail and manufacturing sectors. HBR’s workforce reduction insights

What is the purpose of last in, first out (lifo)?

The purpose of the Last In, First Out (LIFO) method is to manage inventory and to value it at the cost of the most recent items acquired. The main advantages of LIFO method are:

  1. It reflects Current Cost: The LIFO method reflects the current cost of goods, which is important for companies that operate in industries with rapidly changing prices.
  2. Tax Advantage: It can provide a tax advantage for companies as it allows them to report a lower profit on their financial statements, which in turn reduces their income tax liability.
  3. Reflects Realistic Picture of Inventory: LIFO method reflects a realistic picture of inventory turnover and provides a better picture of inventory movement and aging.
  4. Better Match of Costs and Revenues: LIFO method helps in better matching costs and revenues, as it matches the most recent costs with the most recent revenues
  5. Provides a better Picture of Gross Margin: LIFO method provides a better picture of the gross margin of a company, which is the difference between the cost of goods sold and the revenue.

What is the process of calculating last in, first out (lifo)?

The process of calculating Last In, First Out (LIFO) inventory includes the following steps:

  1. Determine the Beginning Inventory: Determine the value of the inventory at the beginning of the period.
  2. Record Inventory Purchases: Record all inventory purchases made during the period, including the item description, quantity, and cost.
  3. Calculate the Cost of Goods Sold (COGS): Subtract the value of the ending inventory from the value of the beginning inventory. The result is the cost of goods sold (COGS) using the LIFO method.
  4. Determine Ending Inventory Value: The ending inventory is valued using the most recent cost of the items in the inventory.
  5. Adjust the Financial Statements: The LIFO method is used in the financial reporting to value the inventory and to calculate the cost of goods sold.

What are the pros and cons of last in, first out (lifo)?

Pros of Last In, First Out (LIFO):

  • Simplicity: LIFO is a simple concept and easy to implement, making it a popular choice for basic data structures like stacks.
  • Memory Efficiency: LIFO allows data to be stored and removed in a way that doesn’t require shifting or rearranging, which can be more memory-efficient.

Cons of Last In, First Out (LIFO): SHRM’s RIF and layoff guidance

  • Limited Functionality: Because LIFO only allows for the most recent item to be accessed, it can be limiting for data structures that require more complex access patterns.
  • Not Always the Best Fit: LIFO may not be the best choice for certain types of data or use cases, where other data structures like First In, First Out (FIFO) or priority queues may be more appropriate.

When implementing LIFO or any RIF strategy, HR must balance legal compliance with business objectives and workforce impact. Using pre-employment assessments alongside a structured hiring plan drives results. Strong talent acquisition focused on skills-based hiring improves outcomes.

Frequently asked questions

In HR and workforce management, last-in, first-out (LIFO) is a layoff selection method that terminates the most recently hired employees first. It is the opposite of FIFO (first-in, first-out). LIFO is commonly required by collective bargaining agreements in unionized workplaces to protect senior employees’ job security.

Unions support LIFO because it provides objective, seniority-based criteria for layoff decisions : removing management discretion that could be used to target union activists, older workers, or other protected groups. Seniority-based systems are seen as fair, transparent, and less susceptible to favoritism or discriminatory application.

LIFO is not legally required by US federal law, but it is commonly mandated by collective bargaining agreements (CBAs). Where a CBA specifies LIFO as the layoff method, the employer must follow it. Non-unionized employers have more flexibility in choosing layoff criteria but must ensure their selection process does not have a disparate impact on protected groups.

LIFO can result in retaining less productive or less skilled employees (with longer tenure) while releasing higher-performing newer hires. It may disproportionately affect younger workers and recently hired diverse candidates : potentially reversing diversity gains. It also makes skill-based workforce optimization difficult during restructuring.

Alternatives include: performance-based selection (retaining top performers), skills-based selection (retaining critical skills), job elimination (eliminating positions rather than ranking people within roles), and a combination approach weighting multiple factors. All alternatives must be applied consistently and documented thoroughly to withstand legal scrutiny.

Key risks include disparate impact under Title VII, ADEA (protecting workers 40+), and ADA. HR should conduct a Reduction in Force (RIF) analysis before implementation : reviewing the demographic profile of selected vs. retained employees for statistical anomalies. Legal counsel review is strongly recommended before any layoff action.