During a period of rising costs, which inventory method yields the highest COGS?

• A. FIFO
• B. Average cost
• C. LIFO
• D. Specific identification

Answer: (C)

When costs are rising, the way you assign costs to items sold determines how high the cost of goods sold becomes. LIFO uses the most recent (and typically higher) purchases for COGS because you’re selling the newest items first. That pushes COGS up and leaves older, cheaper costs in ending inventory, which is why LIFO yields the highest COGS in a period of rising costs.

FIFO, on the other hand, uses older, cheaper costs for COGS, so COGS tends to be lower and ending inventory higher. The average cost method blends all costs, giving a COGS that falls between FIFO and LIFO. Specific identification depends on which exact items are sold; it can be high if the sold items are costly, but it isn’t guaranteed to be the highest in general.