What is Last In First Out (LIFO)?
Last In, First Out (LIFO) is a method used in inventory management and workforce reduction processes. It operates on the principle that the most recently added (or "last in") item or employee is the first to be removed (or "first out").
Applications of LIFO:
Inventory Management:
Common in accounting, LIFO assumes that the newest inventory is sold or used first.
Example: In periods of rising prices, LIFO can reduce taxable income by matching recent higher costs with current revenues.
Workforce Reductions:
Used during layoffs, where employees who joined most recently are let go first.
Often implemented to protect the more experienced and longer-serving staff.
Key Features of LIFO:
Inventory Costing: Ensures cost of goods sold (COGS) reflects current market prices.
Employee Management: Provides a structured approach to layoffs.
Industries: Widely used in retail, manufacturing, and organizations with fluctuating demand.
Advantages of LIFO:
Reduces tax liabilities during inflationary periods in inventory accounting.
Protects senior employees in workforce decisions.
Disadvantages of LIFO:
May not reflect the actual physical flow of goods.
Can demotivate newer employees during layoffs.
Not accepted under International Financial Reporting Standards (IFRS) for accounting.
LIFO is a practical approach in certain scenarios but must be chosen based on organizational needs and compliance requirements.