Final answer:
The inventory costing method that will produce the lowest income tax bill when prices are up is the LIFO (Last-In, First-Out) method.
Step-by-step explanation:
The inventory costing method that will produce the lowest income tax bill when prices are up is the LIFO (Last-In, First-Out) method.
Under the LIFO method, the most recent purchases are considered as the first to be sold. This means that the cost of goods sold is based on the latest, higher-priced inventory, resulting in a lower taxable income and, consequently, a lower income tax bill.
For example, if a company has purchased inventory at different prices over time and the prices have increased, the LIFO method assumes that the latest, more expensive inventory is sold first, reducing the profit and taxable income compared to the FIFO and weighted average methods.