What is the LOFO principle?

LOFO (Lowest In – First Out) is a value-based consumption and valuation method. In contrast to time-based methods such as FIFO (First In – First Out) or LIFO (Last In – First Out), LOFO determines which goods are removed or consumed first based on the price of the inventory. In concrete terms, this means that the cheapest items in stock are always used first, while more expensive goods remain in storage for the time being. The focus is therefore clearly on cost control and the valuation of inventory, rather than on the physical order in which items are stored.

How does LOFO work?

The principle is simple: whenever stock is removed from the warehouse, the batch with the lowest cost price is selected. This procedure is particularly useful for internal costing and consumption assessment. Physically, stock does not necessarily have to be removed according to the LOFO method, as it primarily affects accounting and valuation. This allows companies to accurately reflect the costs of consumed inventory while conservatively maintaining the value of remaining inventory.

Areas of application

LOFO is primarily used where cost management and inventory valuation play a central role. Typical areas of application are:

• Internal calculation: Companies can realistically represent consumption costs based on the cheapest inventory.
• Cost control in the event of price fluctuations: LOFO enables inventory values to be controlled so that the cheapest inventory is used first, while the more expensive inventory remains in storage.
• Planning and reporting: LOFO offers a transparent method for analyzing inventory values and consumption costs, making it ideal for internal reports and corporate management.

Especially in markets with highly fluctuating material prices, LOFO can help make costs transparent and controllable.

Advantages and disadvantages

The LOFO method has the advantage that the cheapest stocks are used first. This allows companies to manage their cost structures in a targeted manner. At the same time, the higher-priced stocks remain in the warehouse, which tends to increase the balance sheet value and enables conservative inventory valuation.

However, the disadvantage is that LOFO is costly to implement, as the cheapest stocks must be identified on an ongoing basis. In addition, physical stock movements are not directly reflected and the method is not recognized as standard in many commercial or tax regulations.