Concept Of First In First Out(FIFO) Method, Its Advantages And Disadvantages

The method in which materials are issued from the stores on a first come first serve basis is called FIFO method. In FIFO method, materials are issued strictly on a chronological order. The units of opening stocks of materials are issued first, the units from the first purchase are issued next and the closing stock is remain in stock always from the latest purchase. The value of the closing stock of materials is at the price of the latest purchase.

Advantages Of FIFO
Followings are the advantages of FIFO method.

1. FIFO method is easy to understand and operate.
2. FIFO method is useful where transactions are not voluminous and prices of materials are falling.
3. FIFO method is suitable for bulky materials with high unit prices.
4. FIFO method helps to avoid deterioration and obsolescence.
5. Value of closing stock of materials will reflect the current market price.I

Disadvantages Of FIFO
Some disadvantages of FIFO method are as follows.

1. FIFO method is improper if many lots are purchased during the period at different prices.
2. The objective of matching current costs with current revenues can not be achieved under FIFO method.
3. If the prices of materials are rising rapidly, the current production cost may be understated.
4. FIFO method overstates profit especially in inflation.