FIFO, LIFO, Simple & Weighted Average - Material
Cost -Shilpa Prakash
Materials issued from stores are debited to the jobs or work orders
which received them and credited to the materials account. These jobs
are debited with the value of materials issued to them. But what is the
value of materials? Theoretically the value includes the invoice price
less trade discount, the freight, cartage and insurance on incoming
materials, expenses of purchase, receiving, storing and record keeping
and carriage from the stores up to the process plant. However, in
practice, it involves minute calculations for including all these expenses
and is a big task compared to the benefit derived from it.
Moreover the price changes according to the market conditions and at
any given time there will be stock of materials purchased at different
times at different prices. Hence the problem as to at what price the
materials should be issued?
There are many methods of pricing material issues. The most important
being: FIFO, LIFO, simple and weighed average methods.
1) First in First Out (FIFO)
Under this 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. The
units in the opening stock of materials are treated as if they are issued
first, the units from the first purchase issued next, and so on until the
units left in the closing stock of materials are valued at the latest cost of
purchases. This method is most suitable in times of falling prices
because the issue price of materials to jobs or work order will be high
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.
