Last-In-First-Out (LIFO) method follows the principle that the last items of materials purchased are issued at first. The valuation of the materials issued is made according to the latest purchase price of materials. The closing stocks of materials are valued always on the earliest prices of materials. In case of a rising price, LIFO method is suitable because material is issued at current market price.
Advantages Of LIFO Method
The main advantages of LIFO method are as follows
1. LIFO method is appropriate for matching cost and revenue.
2. LIFO method is simple to operate and easy to understand.
3. LIFO method facilitates complete recovery of material cost.
4. LIFO method is most suitable when prices are rising.
Disadvantages Of LIFO Method
The main disadvantages of LIFO method are as follows
1. Inventory valuation does not reflect the current prices and therefore are useless in the context of current conditions.
2. Due to variation of prices, comparison of cost of similar job is not possible.
3. Calculations become complicated and cumbersome when rates of receipts are highly fluctuating.
4. LIFO involves considerable clerical work.
Advantages Of LIFO Method
The main advantages of LIFO method are as follows
1. LIFO method is appropriate for matching cost and revenue.
2. LIFO method is simple to operate and easy to understand.
3. LIFO method facilitates complete recovery of material cost.
4. LIFO method is most suitable when prices are rising.
Disadvantages Of LIFO Method
The main disadvantages of LIFO method are as follows
1. Inventory valuation does not reflect the current prices and therefore are useless in the context of current conditions.
2. Due to variation of prices, comparison of cost of similar job is not possible.
3. Calculations become complicated and cumbersome when rates of receipts are highly fluctuating.
4. LIFO involves considerable clerical work.
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