What HIFO means
HIFO (highest in, first out) is a warehousing method in which the highest-cost goods in a particular product class are sold or leave the warehouse first. In other words, goods are stored according to price, much like the LOFO method. Product classes may vary in price due to factors such as seasonal fluctuations, export restrictions or increasing demand. The HIFO method is used to calculate the value of the remaining inventory using the lowest purchase prices for financial reporting purposes. This inventory valuation method is no longer permitted under German tax and accounting law.
HIFO application areas
This method is only suitable for goods (such as wood or plastic pipes) that do not deteriorate in quality over time since HIFO does not consider how long something has been stored in the warehouse. The FIFO method is usually used for goods that are perishable or age rapidly.
The HIFO method generally uses storage systems with fixed bin locations such as high-bay warehouses since the products need to be re-sorted frequently. That means the most expensive goods are kept up front, where they are ready to be pulled.
Companies that store high-cost raw materials use this method to protect more expensive goods from theft and respond better to market conditions with the remaining low-cost products.
The HIFO method assumes that high-cost products have already left the warehouse at the time of valuation (lower of cost or market method). The value of the final inventories is thus assumed to be low, and high sales are shown in the financial statements. Other goals of this method are low inventory risk, lower capital commitment and profit optimisation. As described above, German law prohibits the use of this simplified valuation method when taking inventory.