Production Management

Advantages and Disadvantages of Last in First out (LIFO) Method

Last in-First-Out Method or Life Method is another inventory pricing method based on cost. As against the First in First Out method the issues under this method are priced on the assumption that last items materials purchased up to the data of issue are the first to be issued. This method is suitable in times of rising prices because material will be issued from the latest consignment at a price which is closely related to current price levels as possible.

Advantages of Last in First out (LIFO) Method:

The following are important advantages of this method.

1. Materials are issued at cost price and, therefore, no profit loss will result by following this method. Like FIFO, this method recovers cost from production because actual cost of materials is charged to production.

2. Production is charged at the recent prices as far as possible because materials are issued from the latest consignment.

3. In times of rising prices, this method is suitable because materials are issued at the current market prices which are high. The method thus help in showing a lower profit because of increased charge to production during periods of rising prices and lower profit reduces burden of income tax.

Disadvantages of Last in First out (LIFO) Method:

The following are main disadvantages :

1. Like FIFO this method may lead to electrical error as every time an issue is made, the store ledger clerk will have to go through his record to ascertain the price to be charged.

2. Like FIFO comparison between one job and the other job will become difficult because one job started a few minutes after another of some type may
bear a different charge for materials consumed, merely because the earlier job exhausted the supply of the lower priced or higher priced materials in stock.

3. The stock in hand is valued at a price which does not reflect current market price. Consequently, closing stock will be understand or overstated in the Balance Sheet.

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