FIFO is most usable technique of valuation of material issue in manufacturing and trading industries. It means First in, First Out. We will send that material for production first which we bought first. We also record the cost of issue on this basis. In other words, closing stock's value in store will be the purchase value of material which we purchased at the end. This system of valuation of cost is very useful where there is the trend of decreasing prices, because we will charge high cost to the units which we bought earlier to new. But this method is not useful in the trend of increasing prices.
Merits of FIFO Method
1. # This method is very logical because material should be issued first which we bought first and apply the cost of that material as issue price.
2.# Because we issue the material at its purchase price, so closing stock can be calculated correctly.
3.# Closing stock's cost automatically shows the market price because last bought goods price will be applied for calculating the cost of closing stock.
Demerits of FIFO Method
1. In case, there is fluctuation in prices, we can not calculate correct cost of material issued.
2. We also can not compare on job's cost with other job's cost in case prices are fluctuating.
3. This is not good method in inflation.
For Example
Opening balance of material on 1st jan. 2010 in store 100 units @ $ 4
Issued the material on 4th Jan. 2010 from store 90 units
Purchased on 5 Jan. 2010 for store 50 units @ $ 5
Purchased on 10 Jan. 2010 for store 20 units @ $ 6
Issued the material on 15th Jan. 2010 from store 10 units
Calculate the cost of issue and closing stock, if issue are to be priced on the principle of FIFO
Merits of FIFO Method
1. # This method is very logical because material should be issued first which we bought first and apply the cost of that material as issue price.
2.# Because we issue the material at its purchase price, so closing stock can be calculated correctly.
3.# Closing stock's cost automatically shows the market price because last bought goods price will be applied for calculating the cost of closing stock.
Demerits of FIFO Method
1. In case, there is fluctuation in prices, we can not calculate correct cost of material issued.
2. We also can not compare on job's cost with other job's cost in case prices are fluctuating.
3. This is not good method in inflation.
For Example
Opening balance of material on 1st jan. 2010 in store 100 units @ $ 4
Issued the material on 4th Jan. 2010 from store 90 units
Purchased on 5 Jan. 2010 for store 50 units @ $ 5
Purchased on 10 Jan. 2010 for store 20 units @ $ 6
Issued the material on 15th Jan. 2010 from store 10 units
Calculate the cost of issue and closing stock, if issue are to be priced on the principle of FIFO
Explanation
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