Advantages of First in First out (FIFO) Costing
Advantages claimed for first in first out (FIFO) costing method are:
1. Materials used are drawn from the cost record in a logical and systematic manner.
2. Movement of materials in a continuous, orderly, single file manner represents a condition necessary to and consistent with efficient materials control, particularly for materials subject to deterioration, decay and quality are style changes. During periods of inflation the earliest materials that have the lowest purchase price will be issued
3. The method leads to a lower costs of sales calculations and therefore a high profit than would be obtained by using either of the other method, and mostly FIFO is recommended method used in external financial accounting purposes.
FIFO method is recommended whenever:
1. The size and cost of units are large.
2. Materials are easily identified as belonging to a particular purchased lot.
3. Not more than two or three different receipts of the materials are on a materials card at one time.
Disadvantages or Limitations of FIFO Method
1. FIFO method is definitely awkward if frequent purchases are made at different prices and if units from several purchases are on hand at the same time.
2. Added costing difficulties arise when returns to vendors or to the storeroom occur.