What is the HIFO principle?

HIFO stands for “Highest In – First Out” and describes a valuation method in which those goods or materials that entered the warehouse at the highest cost price are consumed or removed first. In contrast to the classic consumption sequence methods FIFO (First In – First Out) and LIFO (Last In – First Out), HIFO is not based on the chronological order in which goods are stored, but purely on the value of the inventory.

How the HIFO principle works

The core of the HIFO method is the identification of the most expensive item available. This is the first to be written off or further processed. Once these stocks are used up, the next most expensive batch follows.

Since the order of withdrawal is based solely on price, HIFO does not necessarily correspond to the actual physical movement of goods in the warehouse. Withdrawal can still be based on practical criteria, as the HIFO principle refers to the valuation in accounting and not to logistical handling.

Area of application: Inventory valuation and cost control

HIFO is primarily used in the context of inventory and material valuation. By giving priority to writing off the most expensive inventory, the costs recorded as consumption increase, while the remaining inventory is valued at lower prices. This method can be useful in certain cost accounting models, for example if you:

• want to deliberately reflect high consumption costs,
• need to take price fluctuations into account, or
• pursue a conservative valuation internally.

In contrast to the FIFO and LIFO methods, however, the HIFO method is not a generally accepted standard method in financial accounting. It is mainly used internally and is not permitted in many statutory accounting systems.

Advantages and limitations

Advantages:

• Realistic representation of high material costs in volatile markets
• Conservative valuation of remaining stocks
• Targeted control of cost structures possible

Limitations:

• More complicated valuation, as the most expensive batches must be identified on an ongoing basis
• Often not compatible with commercial or tax law requirements
• Does not reflect actual goods movements in the warehouse