Advantages and Disadvantages of First-in-First out Method (FIFO)

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First-in-First out Method (FIFO) – It is a method of pricing the issues of materials, in he order in which they are purchased. In other words, the materials are issued in the order in which they arrive in the store or the items longest in stock are issued first. Thus each issue of material only recovers the purchase price which does not reflect the current market price. This method is considered suitable in times of falling price because the material cost charged to production will be high while the replacement cost of materials will be low. But, in the case of rising prices, if this method is adopted, the charge to production will be low as compared to the replacement cost of materials. Consequently, it would be difficult to purchase the same volume of material (as in the current period) in future without having additional capital resources. The advantages and disadvantages of the method may be stated as follows :

Advantages :

1. It is simple to understand and easy to operate.

2. Material cost charged to production represents actual cost with which the cost of production should have been charged.

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3. In the case of falling prices, the use of this method gives better results.

4. Closing stock of material will be represented very closely at current market price.

Disadvantages:

1. If the prices fluctuate frequently, this method may lead to clerical error.

2. Since each issue of material to production is related to a specific purchase price, the costs charged to the same job are likely to show a variation from period to period.

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3. In the case of rising prices, the real profits of the concern being low, they may be inadequate to meet the concern’s demand to purchase raw materials at the ruling price.

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