Under rising product prices, which inventory method results in higher COGS?

Under rising product prices, which inventory method results in higher COGS?

• A. Specific identification
• B. First-in First-out
• C. LIFO
• D. FIFO

Answer: (C)

In periods of rising prices, the inventory method that uses the most recent, higher costs for cost of goods sold will push COGS up. This is what LIFO does: it assigns the cost of the last units purchased to COGS, so when prices have climbed, those latest, pricier costs flow through to COGS. That makes COGS higher and leaves older, cheaper costs in ending inventory. Specific identification can vary depending on which exact items are sold, so it doesn’t guarantee higher COGS in all scenarios. FIFO, by contrast, uses the oldest costs for COGS, so COGS tends to be lower and ending inventory higher when prices rise.

In periods of rising prices, the inventory method that uses the most recent, higher costs for cost of goods sold will push COGS up. This is what LIFO does: it assigns the cost of the last units purchased to COGS, so when prices have climbed, those latest, pricier costs flow through to COGS. That makes COGS higher and leaves older, cheaper costs in ending inventory.

Specific identification can vary depending on which exact items are sold, so it doesn’t guarantee higher COGS in all scenarios. FIFO, by contrast, uses the oldest costs for COGS, so COGS tends to be lower and ending inventory higher when prices rise.