What is the LIFO principle?

The LIFO principle (“Last In – First Out”) means that the goods or materials that were stored last are removed first. It is therefore a removal or valuation method that is used in particular in warehouse organization and inventory valuation. LIFO is thus the opposite of FIFO (“First In – First Out”), where older stocks are used up first.

How it works

With LIFO, the most recent stock is always removed first. In practical warehousing, this principle is mainly used when the physical structure of the warehouse favors it, for example in block storage or stacking, where removal from the back or bottom is not possible. LIFO is also used in inventory valuation to determine consumption sequences and valuations of warehouse stocks when the actual order of use cannot be traced exactly.

Use in warehouse practice

In logistics, LIFO is particularly suitable for goods

• whose shelf life does not require a strict sequence,
• which are moved in large, homogeneous batches,
• or for storage types where only the front unit can be accessed.

Typical application scenarios include palletized bulk goods, metal goods, or other non-perishable materials. Since newly delivered goods are stored at the front or top, they are automatically the first to be removed.

Significance in inventory valuation

The LIFO method is also used to value inventories. The principle here is that the goods purchased last are considered to be consumed first. In periods of rising prices, this means that goods consumption is valued at higher costs, while inventory retains a lower value. This can have an impact on balance sheet profits and tax burdens.

It is important to note that the LIFO method is permitted under commercial law in some countries, but may not be used in others (e.g., under IFRS).

Advantages of the LIFO principle

• Easy to implement if warehouse structures prevent backward removal
• Low organizational effort, as no stock transfers are necessary
• Potential tax advantages in the event of price increases (depending on the country)

Disadvantages and limitations

• Not suitable for perishable goods, as older stocks remain in place
• Increased risk of obsolete or damaged remaining stocks
• Not permitted everywhere under accounting law, especially in an international context
• Can make transparent inventory management more difficult if the actual consumption patterns deviate