What is HIFO?

HIFO is an acronym for Highest in, First out.

This inventory valuation method assumes that inventory with highest bought in value i.e. highest purchase price in the stock will be consumed first or in other words will be sent out to production hall at first place.

One of the main advantage of using HIFO method is that inventory recognized as an expense or in some cases capitalized, it will always be of highest value for example cost of goods sold or inventory used in self-constructed asset. Also, the closing stock will consist of such inventory which is measured at lowest price. Thus both of these aspects are causing profits to be at minimum level. Thus it can have some implications for dividend policy, tax payable and other profit dependent policies. So, it has the potential of being used for manipulating business profits much more easily then other well known inventory valuation method such as FIFO or LIFO.

Remember
International Accounting Standard – IAS 2 permits only the following cost formula to assign cost to the inventory:

  • Specific identification of cost method or Specific cost method
  • FIFO method
  • Weighted average method

Even though it has limited to no use in financial accounting but it can be considered by the management while determining the price of the commodity if the management is trying to maximize the profits under worst case scenario i.e. Maximin philosophy.

1 COMMENT

  1. Comment: plz provide much more advantages & disadvantages of HIFO

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