Production Management

Advantages and Disadvantages of First in First out (FIFO) Method

Under First in First out Methods or FIFO Method method, material is first issued from the earliest consignment on hand and priced at the cost at which that consignment was placed in the stores. In other words, materials received first are issued first. This method is most suitable in times of falling prices because the issue price of materials to jobs or works orders will be high (materials issued from the earliest consignments which were purchased at a higher rate) while the cost of replacement of materials will be low.

But in case of rising prices, this method is not suitable because the issue price of materials to production will be low while the cost of replacement of materials will be high.

Advantages of First in First out:

This method has following advantages :

1. Under this method, the materials are issued at the purchase price and, therefore, the cost of jobs or work orders will be correctly ascertained so far as materials are concerned. Thus this method recovers the cost price of the materials.

2. As discussed earlier, this method is very useful when prices are falling.

3. This method is simple to understand and easy to operate.

4. This method is a logical method because it takes into account the normal procedure of utilizing first those materials which have been received first.

5. Closing stock of materials will be valued at the market price as the closing stock under this method consists of recent purchase of materials.

Disadvantages of First in First out:

This method has following disadvantages :

1. This method increases the possibility of clerical errors if the prices at fluctuate considerably at every time an issue of material is made, the store ledger clerk will have to go through his record to ascertain the price to be charged.

2. If the prices fluctuate, comparison between one job and the other job becomes difficult because one job started a few minutes later than another of same nature may be issued materials at different prices, merely because the earlier job exhausted the supply of the lower priced materials in stock.

3. When prices rise, the issue price does not reflect the market price and, therefore, the charge to production is low because the cost of replacing the material consumed will be higher than the price of issue.

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