What is FIFO Method (First in First Out)?

Under this method material is first issued from the earliest consignment on hand priced at
the cost at which that consignment was placed in the stores.

In other words, material received first is issued first.

This Method is most suitable in times of falling prices because the issue price of material to
jobs or works orders will be high while the cost of replacement of material will be low.

Advantages of FIFO Method:

I. The main advantages of FIFO method is that is simple to understand

and easy to operate.
II. It is a logical method because it takes into consideration of normal
procedure of utilising first these materials which are received first.
III. Under this method, materials are issued at the purchase price.
IV. This method is useful when prices are falling.

Disadvantages of FIFO Method:

I. This method increases the possibility or clerical error.

II. In Case of fluctuation in prices of materials, comparison between one
job and the other job becomes difficult.
III. For pricing one requisition of material more than one price has often to
be taken.
IV. When prices rise, the issue price doesn’t reflect the market price as
materials are issued from the earliest consignments.
What is LIFO Method (Last in First Out)?
As against the first in first out method the issues under this method are priced in the
reserve order of purchases that is the price of the latest available consignment is taken.

This method is sometimes known as the replacement cost method because materials are
issued at the current cost to jobs or work orders except when purchases were made long
ago.

This method is suitable in times of rising prices. Because material will be issued from the
latest consignment at a price which is closely related to the current price level.

This method was first introduced in the U.S.A during the Second World War to get the
advantages of rising prices.

Advantages of LIFO Method:

I. Like LIFO method, this is simple to operate. It is useful when transaction is not too
many and the prices are fairly steady.
II. This method recovers cost from production because actual cost of material is
charged to production.
III. Production is charged at the recent prices because materials are issued from the
latest consignment.
IV. In times of rising prices, LIFO method of prising issues is suitable because material
are issued at the current market prices which are high.

Disadvantages of LIFO method:

I. This method may lead to clerical errors as every time an issue is made.
II. This method comparison between one job and the other job will become difficult
because one job started a few minutes consumed.
III. For pricing a single requisition, more than one price has often to be adopted.
IV. The stock in hand valued at price which does not reflect current market price .