Last In, First Out (LIFO): Definition, How the LIFO Method Works, and When to Use It
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Last in, first out, or LIFO, is a picking and issuing principle that only fits certain warehouses and certain goods. Everything depends on the racking you use and on how long the products you store can sit at the back without losing value.
As an inventory valuation method, LIFO is a separate question. In the US it’s permitted under specific rules, while international accounting standards don’t allow it at all.
What Is Last In, First Out? The LIFO Definition and How It Works in the Warehouse
LIFO stands for Last In, First Out. In a warehouse where goods can only be accessed from one side, the practical consequence of this LIFO definition is that the oldest units end up at the back and only leave once the units in front of them have been removed.
In many warehouses, the last in, first out method isn’t established as an independent rule. Instead, it’s determined by how the storage location is set up. When goods enter and leave from the same side, the last unit stored is usually the first one that can be reached.
Hypothetical Example: A ceramic tile distributor receives three deliveries of identical pallets in January, March, and May and places them in the same lane, which can only be accessed from one end. In June, orders are filled with the May pallets. The January pallets only leave once the lane is completely empty, and if the lane is restocked continuously, that moment may never come.
Like many examples of LIFO in practice, this one shows the defining trait of last in, first out in a real warehouse: the age of whatever sits at the back can go unnoticed.
Storage Systems That Favor the Last In, First Out Method
The systems that favor the LIFO method most are high-density storage systems, where pallets are loaded and unloaded from a single face. Systems with direct access to every pallet, or with loading and unloading on opposite sides, don’t favor LIFO on their own.
Racking Types by Access and the Issuing Principle They Favor
| System | How Pallets Are Accessed | Principle It Favors | Best Fit |
|---|---|---|---|
| Drive-in racking | The forklift enters the lane from the same side it loads from | LIFO | Few SKUs and many pallets per SKU |
| Push-back racking | Pallets are pushed toward the back of inclined lanes and accessed from a single aisle | LIFO | Several pallets deep, usually with one SKU per lane |
| Selective pallet racking | Direct access to every pallet | No physical issuing principle is imposed; it depends on how stock is managed | Many SKUs with direct access to individual units |
| Pallet flow racking | Goods are loaded on one side and leave from the opposite side | FIFO | Goods where FIFO rotation is important |
- Drive-In Racking: Maximum Density With One SKU per Lane
Among high-density systems, drive-in racking is one of the simplest. Forklifts drive into interior lanes and work several pallet positions deep, without any aisles in between. In return, each lane is usually dedicated to a single SKU. - Push-Back Racking: Less Depth, More SKUs
In push-back racking, each new pallet pushes the previous one toward the back of the lane on an inclined plane. Lanes are usually assigned to a single SKU, and because they are less deep, different SKUs can be spread across more lanes than in a deep drive-in setup. - What a High-Density Storage System Means for LIFO
The density of high-density storage systems comes at a price. In a last in, first out setup with access from only one side, reaching a specific pallet at the back means first removing the pallets in front of it. Because each lane is usually dedicated to one SKU, these systems work well with the fixed location assignment described in our article on warehouse management and organization. To divide the warehouse into zones based on turnover, our warehouse logistics guide explains zoning and slotting.
When the LIFO Method Makes Sense and When It Doesn’t
The LIFO method makes the most sense when goods can stay at the back for long periods without any significant loss of value or quality. That’s why it’s worth checking both the characteristics of the goods and their usual turnover.
Goods and Conditions That Fit Last In, First Out
Two characteristics of goods favor last in, first out:
- Goods with low sensitivity to age, such as certain building materials, ceramic tiles, or glass, as long as there is no significant risk of deterioration or obsolescence.
- Homogeneous goods, where two units with different receiving dates are interchangeable.
Goods and Conditions That Don't Fit Last In, First Out
The LIFO method is not recommended for items whose value depends on their age. When goods have an expiration date or a best-by date, or can deteriorate over time, it’s usually better to use FIFO or, when the expiration date determines the order in which goods should leave, FEFO.
Electronic components are a case that requires special attention. Even though they don’t have an expiration date the way food does, they can lose value through technological obsolescence. If age affects the value or usefulness of a product, it’s best to avoid a setup that systematically leaves the oldest units at the back.
When a specific lot needs to be located, last in, first out doesn’t make that impossible, but it does require you to record what’s in each lane. Lot traceability depends on recording each lot and its movements, regardless of the issuing principle you use.
Pros and Risks of LIFO in Practice
The advantages of LIFO come from the physical system more than from the principle itself. The risks come from leaving goods waiting at the back.
Pros and Risks of a High-Density, Single-Access Storage System, by Area
| Area | What You Gain | What You Risk |
|---|---|---|
| Space and turnover | Fewer aisles and higher storage density | Units at the back may sit without moving for too long |
| Operations and control | Loading and unloading from the same face | Units at the back may be less visible to staff |
If their age isn’t monitored, the problem may only surface during a physical count or once the goods have already lost value or usefulness. Two metrics help you spot it earlier: the stock turnover ratio per SKU and the list of non-moving items.
Practical Tip: In a LIFO lane that is restocked without pause, the pallet at the back may never leave. Record the entry date of every pallet when you put it away. Schedule a complete clearance of the lane once its age exceeds the time the goods can stay in storage without a significant risk of deterioration, obsolescence, or loss of value. Perpetual inventory makes this record easier to keep, because every receipt and every issue is documented the moment it happens.
LIFO or FIFO: Three Questions to Decide SKU by SKU
You’ll find the full comparison of issuing principles, including FEFO and its risks, in our article on the FIFO method. For a specific SKU, three questions are enough:
- Does it lose value or quality over time? If so, last in, first out is usually not a good fit.
- Do you have few SKUs with many pallets each? If so, a high-density system set up for LIFO can be a way to gain storage density.
- Do you need to know which lot each unit comes from? If so, either principle can work, but you’ll need a strict record of lots and movements.
It’s not unusual for one warehouse to apply different principles depending on the product family.
The LIFO Inventory Method in Accounting: What US GAAP and the IRS Say
It’s important to separate two concepts. Physical LIFO describes the order in which units are stored and removed. The LIFO inventory method in accounting is a way of assigning costs to inventory: units that are issued are valued first at the cost of the most recently purchased units. A warehouse that physically operates on a last in, first out basis doesn’t have to value its inventory with the LIFO method, and a company that uses LIFO accounting doesn’t have to move its pallets that way.
In the United States, US GAAP permits the LIFO inventory method alongside FIFO and weighted average cost. For tax purposes, a business has to elect LIFO with the IRS by filing Form 970, and once it’s adopted, the business generally has to keep using it unless the IRS agrees to a change. The LIFO conformity rule also applies: if you use LIFO to calculate taxable income, you must use it in your financial statements as well. International Financial Reporting Standards (IFRS) don’t allow LIFO at all, which matters for companies that report to a parent company or investors outside the US.
Many guides present the LIFO method as a way to save on taxes during periods of inflation. In the US, this argument has a real basis, because matching the newest, higher costs against revenue lowers reported profit and therefore taxable income. But it’s worth reading those guides with caution. Lower taxable income also means lower profits in the statements you show to lenders and investors. In addition, if older, cheaper cost layers are used up, a so-called LIFO liquidation, taxable income can rise sharply in a single year. Before choosing the LIFO inventory method for your business, discuss your specific situation with your CPA or tax advisor.
To see the difference between FIFO and weighted average cost in numbers, take a look at our FIFO vs. weighted average cost example. For an overview of all inventory valuation methods, see our inventory control guide.
Controlling Stock in a LIFO Warehouse With Timly
Timly is cloud-based inventory software. It doesn’t impose an issuing principle, since that depends on how your operations are organized, but it makes it easier to keep the records LIFO needs to control what’s sitting at the back:
- QR labels on locations: Storage locations can be labeled with QR codes and scanned with a smartphone to record movements.
- Custom fields by category: Record the entry date, lot, or expiration date of your goods, the data you need to know what has been sitting at the back the longest.
- Movement history per item: Check what came in and when it went out, and compare that with what’s still in storage.
Inventory valuation for accounting purposes is still handled in your ERP or accounting software. Timly doesn’t replace these systems, but it can connect to them via API.
Conclusion: Check Your Racking First, Then Choose Your Last In, First Out Strategy
If your warehouse uses drive-in or push-back racking with access from only one side, your operations most likely follow a last in, first out flow. Before assuming LIFO is the right principle, look at what’s at the back of each lane and whether those goods can tolerate the wait.
Start with the deepest lanes: write down the entry date of the pallet at the back and compare it with what that SKU can handle. If the result makes you uncomfortable, the problem isn’t the LIFO method itself, but the fact that nobody was tracking the age of that stock. If you work with selective pallet racking or pallet flow racking, the structure itself doesn’t force you to use LIFO.
Your principle will depend on how you organize the flow of goods in and out. With Timly, you can record entry dates and lots for every location and keep an eye on aging stock, whichever principle you choose.
FAQs About Last In, First Out
LIFO stands for “Last In, First Out.” FILO, or “First In, Last Out,” describes the same principle from the opposite angle: the first unit stored is the last one to leave. In warehouse practice, the two terms mean the same thing. LIFO should not be confused with FIFO, “First In, First Out,” where the oldest units leave first.
With the LIFO inventory method, the calculation is done in layers. Each purchase creates a cost layer with its own price, and every issue uses up the most recent layer first. Here is one of the simplest examples of LIFO in accounting. You buy 100 units at $10 and then 100 units at $15, and you sell 120 units. The cost of goods sold is:
100 × $15 + 20 × $10 = $1,700
That works out to an average of $1,700 ÷ 120 = $14.17 per unit sold. The 80 units left in inventory are valued at the oldest cost:
80 × $10 = $800
This calculation is permitted under US GAAP, but not under IFRS.
Yes. With selective pallet racking or block stacking, you can still follow the last in, first out method as long as you keep track of what came in last, either by hand or with software. If you need flexibility, pallet shuttle systems support both LIFO and FIFO.
It can be, but it doesn’t suit every operation. Whether LIFO works depends on the warehouse layout, the range of SKUs, and how quickly stock needs to turn over.
No. IFRS doesn’t allow the LIFO inventory method, so companies that report under international standards have to use FIFO or weighted average cost. In the US, LIFO remains permitted under US GAAP, subject to the IRS rules described above.
