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Cost Accounting – I
Notes This method uses the price of first batch received from all issues until all units from this batch
have been issued after which the price of the next batch received becomes the issue price. Upon
that batch being fully issued the price of the next batch received is used, and so on.
Figure 5.1: Methods first Pricing the Material Issues
Advantages of FIFO Method
The following are the advantages of FIFO method:
(a) The method is very simple and it is easy to operate,
(b) It is claimed that since the materials are charged into production at actual cost in order of
receipt,
(c) It is more accurate method,
(d) It is also realistic since items are issued to shop in order of receipt, and
(e) Valuation of stock balance is a fair commercial value.
Disadvantages of FIFO Method
This method suffers from the following disadvantages:
(a) It is cumbersome and shows inflated profits during a period of rising prices,
(b) This method can, therefore, be used satisfactory where the following conditions exist:
Where inventories turn over rapidly, and
Where the inventory is not a major factor in the profit or current asset situation.
5.2 Last-in-First-out Method (LIFO)
This is the reverse of the FIFO method. Under this method, it is presumed that latest receipts
are used first. The cost of the last lot of materials received is used to price requisition until that
consignment is exhausted. Then, the next lot pricing is used and so on through successive lots.
This method, thus, takes note on fluctuations in price unlike FIFO.
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