- Definition and Explanation of FIFO Method
- Advantages of First in First out-FIFO-Costing Method
- Example of FIFO Method
- Disadvantages or Limitations of FIFO Costing Method
Definition and Explanation:
The first in first out (FIFO) method of costing is used to introduce the subject of materials costing. The FIFO method of costing issued materials follows the principle that materials used should carry the actual experienced cost of the specific units used. The methods assumes that materials are issued from the oldest supply in stock and that the cost of those units when placed in stock is the cost of those same units when issued. However, FIFO costing may be used even though physical withdrawal is in a different order.
Advantages of First in First out (FIFO) Costing Method:
Advantages claimed for first in first (FIFO) out costing method are:
- Materials used are drawn from the cost record in a logical and systematic manner.
- 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.
FIFO method is recommended whenever:
- The size and cost of units are large.
- Materials are easily identified as belonging to a particular purchased lot.
- Not more than two or three different receipts of the materials are on a materials card at one time.
Example:
This example is based on the following transactions:
February
(1)Beginning balance: 800 units @ $6 per unit.
(4)Received 200 units @ $7 per unit.
(10)Received 200 units @ $8 per unit.
(11)Issued 800 units.
(12)Received 400 units @ $8 per unit.
(20)Issued 500 units.
(25)Returned 100 excess units from the factory to the storeroom to be recorded at the latest issued price.
(28)Received 600 units @ $9 per unit.
Calculation for the above transactions would be as follows:
FIFO Costing Method
Disadvantages or Limitations of FIFO Method
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. Added costing difficulties arise when returns to vendors or to the storeroom occur.