Inventory Valuation Method – First In First Out Method

First In First Out Method (FIFO)

Under this method, it is assumed that the materials/goods first received are the first to be issued/sold. Thus, according to this method, the inventory on a particular date is presumed to be composed of the items which have been acquired most recently

Advantages. The FIFO method has the following advantages:

1. It values stock nearer to current market prices since stock is presumed to be consisting of the most recent purchases.

2. It is based on cost and, therefore, no unrealised profit enters into the financial accounts of the company.

3. The method is realistic since it takes into account the normal procedure of utilisinglselling those materials/goods which have been longest in stock.

Disadvantages. The method suffers from the following disadvantages:

1. It involves complicated calculations and hence increases the possibility of clerical errors.

2. Comparison between different jobs using the same type of material becomes some times difficult. A job commenced a few minutes after another job may have to bear an entirely different charge for materials because the first job completely exhausted the supply of materials of the particular lot

The FIFO method of valuation of inventories is particularly suitable in the following

circumstances:

(i) The materialslgoods are of a perishable nature.

(ii) The frequency of purchases is not large.

(iii) There are only moderate fluctuations in the prices of materials/goods purchased.

(iv) Materials are easily identifiable as belonging to a particular purchase lot.