![]() The cost of material charged to production may not reflect the current market price. ![]() The following are the disadvantages and drawbacks of the FIFO method of costing: Beneficial whenever the size and cost of material units are large.Valuation of closing inventory is closer to current market price.Materials issued are charged to production at actual cost in the order of their receipt.Materials used are drawn from the cost record in a legal order.Simple to operate because no complex calculations are involved.The following are the main advantages of the FIFO method of costing: It is placed on the materials card balance ahead of all the units on hand at the same price as it was issued to the factory. The return of excess materials, initially issued to the factory for a particular job, to the storeroom is treated as the oldest stock on hand. This is why FIFO is often referred to as the original price method. The materials used in a job or process are charged at the price of their original purchase. That is to say, the materials are issued from the oldest supply in stock in this method of costing. The FIFO method of costing is based on the assumption that the various lots of materials that are purchased are used in the same order in which they are received. In other words, under FIFO, the cost of materials is charged to production in the order of purchases.Įarlier costs recorded in materials ledger cards are used for costing requisitions, and the balance consists of units received later. Specifically, FIFO assumes that the first cost received in stores is the first cost that goes out from the stores. In terms of flow of cost, the principle that FIFO follows is clearly reflected in its name. First in, first out (FIFO) is an inventory costing method that assumes the costs of the first goods purchased are the costs of the first goods sold.
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