The Advantages and Disadvantages of FIFO Mehtod. (Cost Accounting)
The following are the main advantages of FIFO Method:
- The main advantage of FIFO method is that it is simple to understand and easy to operate.
- It is a logical method because it takes into consideration the normal procedure of utilizing first those materials which are received first. Materials are issued in order of purchases, so materials received first are utilized first.
- Under this method, materials are issued at the purchase price; so the cost of jobs or work orders is correctly ascertained so far as cost of materials is concerned. Thus, the method recovers the cost price of the materials.
- This method is useful when prices are falling.
- Closing stock of materials will be valued at the market price as the closing stock under this method would consist of recent purchase of materials.
- This method is also useful when transactions are not too many and prices of materials are fairly steady.
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The following are the main Disadvantages of FIFO Method:
- This method increases the possibility or clerical errors, if consignments are received frequently at fluctuating prices as very time an issue of materials is made, the store ledger clerk will have to go through his record to ascertain the price to be charged.
- In case of fluctuations in prices of materials, comparison between one job and the other job becomes difficult because one job started a few minutes later than another of the same nature may be issued materials at different prices, merely because the earlier job exhausted the supply of the lower priced materials in stock.
- For pricing rise, the issue price does not reflect the market price as materials are issued from the earliest consignments. Therefore, the charge to production is low because the cost of replacing the material consumed will be higher than the price of issue.