Final answer:
The form of inventory costing that will produce the lowest income tax bill when prices are down is the last-in, first-out (LIFO) method.
Step-by-step explanation:
The form of inventory costing that will produce the lowest income tax bill when prices are down is called the last-in, first-out (LIFO) method. LIFO assumes that the most recently purchased or produced items are sold first, resulting in a higher cost of goods sold (COGS) and a lower ending inventory.
For example, let's say a company purchased inventory at different prices throughout the year. When prices are down, LIFO will assume that the cheaper inventory was sold first, resulting in a higher COGS and a lower taxable income.
It's important to note that the use of LIFO for tax purposes is subject to certain limitations and regulations, so consulting with a tax professional would be advisable.