The Meaning and Definition of FIFO Method. (Cost Accounting)
Under FIFO method material is first issued from the earliest consignment on hand and priced at the cost at which that consignment was placed in the stores.In other words, materials received first are issued first. The units in the opening stock of materials are treated as if they are issued first, the units from the purchase issued next, and so on until the units left in the closing stock of materials are valued at the cost of production according to their chronological order of receipts in the store.
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FIFO method is most suitable in times of falling prices because the issue price of materials to job or works orders will be high (materials issued from the earliest consignments which were purchased at a higher rate) while the cost of replacement of materials will be low. But in case of rising prices this method is not suitable because the issue price of materials to production will be low while the cost of replacement of materials will be high.