oboloo Glossary

Inventory Cost Methods

oboloo Glossary

Inventory Cost Methods

In inventory cost methods, businesses assign the costs associated with their inventory and the products they purchase to the items themselves. The method chosen by a business depends on how it values its inventory and the objectives of its accounting. Generally speaking, businesses use either FIFO (first in, first out) or LIFO (last in, first out) to allocate costs to units of inventory. With FIFO, cost is allocated based on when the units were purchased – first-in units have their cost allocated first, and last-in units have their cost allocated last. With LIFO, the opposite is true: cost is allocated based on last-in units first, and first-in units last.