LIFO, also known as “Last In, First Out”, inventory method is when the newest inventory items, or those that were most recently received into inventory (or otherwise brought into the inventory by means of a positive transaction) are the first items to be charged out. Each positive transaction (such as receipts, transfer in, etc.) is recorded by transaction date to the part record as it comes in to inventory.
This inventory method should not be considered if shelf life or part traceability is necessary. This method will cause splits in data due to the fact that it is set to respect the most recent info applied to the system and not issue parts in the order in which they were received. Meaning lot numbers and cost can be separated as you will see below.
The following example shows the purchase, receipt, charge (or issue to a WO), and additional purchases, and receipts of the parts and how the system maintains the cost associated to the inventory item as it was purchased at.
Below you will see an item that currently has 0 on hand with a unit cost of $5.00.
We then create a purchase order (PO_4), to purchase 3 parts at $8.43. and receive the PO.
A second PO (PO_5) is issued for the same part, but in this instance, the parts cost $6.95. You will see the Purchase in the Part History, but the parts have not been received as of yet.
A part is then charged to a Work Order at the cost of $8.43, what is currently reflected as the unit cost, as well as what the cost was when that particular part was received.
After this part is charged, the next 3 parts arrive from PO_5, and are received in to the system. By receiving these parts, you will notice that the unit cost on the main inventory item record now reflects the cost of $6.95, the price at which the next 3 parts were purchased at.
However, there are still 2 parts in inventory that we received in at $8.43. The system will maintain this cost association to those 2 parts, but the next time this part is charged to a Work Order, the system will use the most recent cost of $6.95 until those 3 parts are used, or more parts are positively added to the system.
The next occurrence in the system is a charge of this inventory item to a Work Order.
Since the system is set to respect LIFO, the part charge will reflect the true cost of the last inventory item as it was received in.
Here you will see a series of charges of the same inventory item, and the cost is reflective of what each part was purchased at. Notice the first part is charged at $6.95 since this was the last cost at receipt of the part before any are issued to the Work Order.
NOTE: The charges window will show the most recent cost from the Inventory Record, but once the charge is processed, it will associate the cost that is associated to that individual part. Therefore, when you get to a part that has a different cost associated with it, it will change after saving the part charge.
As you see in the part history, there is another purchase of this particular inventory item, before all parts are charged, however, the cost per part is what was received most recently. There is a 3rd PO (PO_6) that purchased parts at $5.23, and that cost is associated to all parts charges until all parts received at that cost, processed. The system will then use the next most recent cost, and so forth.
SUMMARY
- Part Purchased and Received on PO_4 at $8.43.
- Part Purchased on PO_5 at $6.95.
- Part Issued (Charged) to WO at $8.43.
- 3 Parts received at $6.95 from PO_5.
- 2 Separate charges of item to WO after receipt of the 3 parts for PO_5 that cost $6.95, and since the system is set to LIFO, the cost associated with the 2 charges is for $6.95 since this is the most recent cost.
- A purchase and receipt of 3 more parts at $5.23 on PO_6
- This now sets the cost of the part at $5.23 on the main record, however, there are still the 3 other parts in inventory. 1 with a cost of $6.95 associated to it, and 2 with a cost of $8.43 associated to them.
Since LIFO is set as the inventory method, the next transactions show that the most recent cost is held until there are no more parts with that cost, then it transitions to the most recent receipt cost or $6.95, and THEN, if not more parts are received, the system will reach the parts from the original PO_4, and will associate a cost of $8.43 to that charge.
- 3 Separate charges of the item to a work order are then processed, and the cost of $5.23 is held to these charges for LIFO purposes.
- A parts charge after the 3 parts with the cost of $5.23 associated with them, then causes the system to associate the cost of $6.95, due to that being the 4th most recent part received and then issued using the LIFO configuration.
- The system reaching a part associated to PO_4, therefore charging it out at $8.43.