This method is the reverse of FIFO and assumes that each issue of stock is made from latest items received in the enterprises .Thus if the last lot to be received is not sufficient to meet an issue,then the balance is assumed to come from the previous lot received still available.The stock on hand is valued at the cost of the earliest items received and not drawn.Advocates of this method claims that it gives the most accurate representation of profits because it matches revenue with current costs.
The last in first out (LIFO) method of costing materials issued is based on the premise that materials units issued should carry the cost of the most recent purchase, although the physical flow may actually be different. The method assumes that the most recent cost (the approximate cost to replace the consumed units) is most significant in matching cost with revenue in the income determination procedure.
Under LIFO procedures, the objective is to charge the cost of current purchases to work in process or other operating expenses and to leave the oldest costs in the inventory. Several alternatives can be used to apply the LIFO method. Each procedure results in different costs for materials issued and the ending inventory, and consequently in a different profit. It is mandatory, therefore, to follow the chosen procedure consistently.