Cost Accounting

The advantages of First In, First Out Method (FIFO)

  • First In, First Out (FIFO) method is uncomplicated to understand and easy to oversee it’s adminstration;
  • FIFO works out normally with the ordinary system by releasing goods which are received first, and later, give out the stock which have stayed for some time in the store;
  • FIFO is useful where a business is not capacious and prices of materials are falling;
  • First In, First Out is the remaining of products will be sold out depending on the market demand price at the market price, while the remaining goods will be the latest purchased material.

The disadvantages of First In, First Out Method

  • Because products issued from the most recent delivery, the current prices are charged; therefore, the outcome of current market prices of supplies, reflected in the cost of transactions provided the supplies, is recently purchased on the stock;
  • This method enhances the leeway of error if deliveries are received often at the unpredictable cost of the products, and a concern of materials is made; the store secretary is forced to enter the new record of the product and the price tag to be used;
  • When there is instability of supplies, evaluation between one work with the previous work becomes complex since one work started a few minutes later with one having almost equal work  issued supplies at dissimilar prices, while affecting the current prices in the market.
       In case prices rise, the buying price is not reproducing as the selling price because the products are sold with the current deliveries in the stock. Thus, the charge of manufacture reduces down the charge of reinstating the products used will increase compared to the capital used in buying the products.

The advantages of Last In, First Out (LIFO)

  • Similar to First In, First Out method, the LIFO is uncomplicated, easy and immensely beneficial when business transaction prices look steady in the market;
  • Production is trading with the current market price and the main reason is that the products are  issued from the current delivery; therefore, the effects of the current selling price of materials in the market is implicated in cost of sales produced by the products that are newly purchased;
  • Like First In, First Out, this method recovers the cost of production because the real cost of material to production charged;
  • During the rising prices, Last In, First Out method of pricing issues is preferable because products issued at the present market prices are high. This method can help in indicating low profit due to rise in charge of production, resulting burden of income tax.

The limitation of Last In, First Out

  • Inventory valuation does not show the current prices and hence they are ineffective in the context of current circumstances;
  • The determination of Last In, First Out for income tax rationale is binding for all succeeding years unless a transformation is authorized by the internal revenue services;
  • The current available stock being traded in the market with the price that is not matching with the current market standard, thus affecting the balance sheet because of overstating the products available;
  • Last In, First Out may lead to clerical errors as every moment an issue is made, the store ledger keeper will have to go through the document records to decide the prices charged;
  • Because of the difference of prices, assessment of the cost of similar work is not possible, hence, the calculations become cumbersome and complicated when rates of receipts are highly unpredictable.
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