First In First Out (FIFO) – Materials and Inventory Costing Method:

Learning Objectives:

1. Define and explain FIFO method.
2. Give an example of FIFO costing method
3. What are advantages and disadvantages of fist in first out (FIFO) costing method?

1. Definition and Explanation of FIFO Method
2. Advantages of First in First out-FIFO-Costing Method
3. Example of FIFO Method
4. 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:

1. Materials used are drawn from the cost record in a logical and systematic manner.
2. 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:

1. The size and cost of units are large.
2. Materials are easily identified as belonging to a particular purchased lot.
3. 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:

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.

You may also be interested in other useful articles from “controlling and costing materials” chapter:

1. Purchases of productive material
2. Purchases of supplies, services, and repairs
3. Materials purchasing forms
4. Receiving materials
5. Invoice approval and data processing
6. Correcting invoices
7. Electronic data processing (EDP)  for materials received and issued
8. Cost of acquiring materials
9. Storage and use of materials
10. Issuing and costing materials into production
11. Materials ledger card – perpetual inventory
12. First-in-First-Out (FIFO) Costing Method
13. Average Costing Method
14. Last-in-First-Out (LIFO) Costing Method
15. Other Methods-Month end average cost, last purchase price or market price at date of issue, and standard cost
16. Inventory valuation at cost or market whichever is lower
17. American Institute of Certified Public Accountant (AICPA) cost or market rules
18. Adjustments for departures from the costing method used
19. Inventory pricing and interim financial reporting
20. Transfer of materials cost to finished production
21. Physical inventory
22. Adjusting Materials Ledger Cards and Accounts to Conform to Inventory Accounts
23. Scrap and waste
24. Spoiled goods
25. Defective work
26. Discussion Questions and Answers about Controlling and Costing Materials

Other Related Accounting Articles:

• Last In First Out (LIFO) – Materials and Inventory Costing Method
• Last In First Out (LIFO) Method Definition
• Materials Ledger Card–Perpetual Inventory
• Cost or Market Whichever is Lower–Inventory Valuation
• First in First Out-FIFO Method Definition
• Physical Inventory – Inventory Valuation
• Storage and Use of Materials
• Other Materials Costing Methods – Month End Average Cost | Market Price at Date of Issue | Standard Cost
• Transfer of Materials Cost to Finished Production–Inventory Valuation
• Electronic Data Processing System (EDP System) for Materials Received and Issued