Production Management

HIFO and Next In First Out Method of Inventory Costing

Highest-in, First-Out Method or HIFO Method is based on the assumptions that stock of materials should be always valued at the lowest possible price. Thus, materials purchased at the highest price are treated as being first issued irrespective of the data of purchase. This method is very suitable when the market is constantly fluctuating because cost of heavily priced materials is recovered from the production at the earliest. But it involves too many calculations as is the case with the LIFO and FIFO methods. Hence, it is generally not used.

Next-in, First-out Method : This method attempts to value material issues at an actual price which is as near as possible to the market price. Under this method, the issues are made at the next price, i.e., the price of materials which has been ordered but not yet received. Thus issues are always at the latest price. This method is better than market price methods under which every time when materials are issued, their market price will have to be ascertained. In case of this method, materials will be issued at the price at which a new order has been placed and this price will hold good for all future issues till a next order is placed. But this method has also not achieved popularity so far.

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