Definition of the Lofo process
The Lofo method is a consumption sequence method that is used to simplify the assessment. It is used to determine the purchase or Manufacturing costs similar items of inventory are required.
It is assumed that the cheapest purchased items are consumed or sold first (lowest in - first out).
The on Balance sheet date Existing quantities are accordingly capitalized at the highest possible values.
The Lofo procedure can be performed as:
Period Lofo method
Period Lofo method, in which the quantities available on the balance sheet date are capitalized with the highest possible valuations.
Permanent Lofo process
Permanent Lofo process, in which all additions and disposals are continuously taken into account.
In both cases, the calculated value corresponds to that of the Fifo method with constantly increasing prices, and that of the Lifo method when prices are constantly falling. From a business point of view, the Lofo procedure does not appear to be very useful, as it contradicts the principle of commercial caution.