Highest In, First Out (HIFO)

The highest in, first out (HIFO) method is an inventory valuation method that assumes that the most recent items purchased are the first ones sold. This means that the cost of the most recent items purchased is used to value the inventory when it is sold.

The HIFO method is often used in industries where the price of inventory is constantly changing, such as the oil and gas industry. This is because the HIFO method can help to smooth out the impact of price changes on the company's financial statements.

To calculate the cost of goods sold using the HIFO method, the following steps are taken:

1. The cost of the most recent items purchased is added to the beginning inventory balance.
2. The cost of the items sold is subtracted from the total inventory balance.
3. The ending inventory balance is the cost of the items that are still on hand.

The HIFO method can be used to calculate the cost of goods sold for both a perpetual inventory system and a periodic inventory system.

In a perpetual inventory system, the cost of goods sold is calculated on a daily basis as items are sold. This is done by subtracting the cost of the items sold from the total inventory balance.

In a periodic inventory system, the cost of goods sold is calculated at the end of an accounting period. This is done by taking the beginning inventory balance, adding the cost of the items purchased during the period, and subtracting the ending inventory balance.

The HIFO method can be used to calculate the cost of goods sold for both a manufacturing company and a merchandising company.

In a manufacturing company, the HIFO method is used to calculate the cost of the raw materials that are used to produce the finished goods. The cost of the raw materials is added to the cost of the direct labor and manufacturing overhead to calculate the cost of the finished goods.

In a merchandising company, the HIFO method is used to calculate the cost of the goods that are purchased for resale. The cost of the goods purchased is added to the cost of the transportation and other costs to calculate the cost of goods sold.

The HIFO method is a simple and easy-to-use inventory valuation method. However, it can sometimes produce inaccurate results if the price of inventory is constantly changing.