FIFO – First in, First Out

First in first out is the method of inventory valuation. As the name implies under FIFO method the first unit of raw material received in the stock is to be issued first to manufacturing department. In other words it assumes that the material is issued from the oldest supplies. FIFO follows the belief that each unit of material should carry actual cost of the specific units. More clearly this method presumes that cost of those units when placed in stocks is the cost of those same units when issued. In some cases due to its practicability FIFO costing method is used though physical movement order of the inventory take place under different method. Following advantages are associated with the use of FIFO method of inventory costing.

• FIFO represents a systematic and logical order of withdrawal of inventory items from the inventory records.

• Material or inventory management becomes an easygoing job.

• Deterioration or decay of material is minimized due to early use of the items.

In practice FIFO method is not used everywhere. It is recommended in the following circumstances:

• When the size and cost of units of materials are large

• Lots of the materials are easily identifiable to bring the order of issuance under FIFO method.

• At one point of time at the material bin card receipts are not too many in the quantity.

• Material purchases are not taking place in a random fashion rather it is purchases under a defined mechanism and specific quantity.

• The prices of the units of material are not keeping on changing rapidly.

• No frequent returns of material are being made to the vendors or suppliers due to faulty deliveries.

Example

Given below is the order of material movement in and from the storeroom of a firm. Determine the material inventory cost in the material card.

 

Solution

Though FIFO method is mainly used to manage raw material inventory but it is also used in valuing work in progress and finished goods inventory. Material is the first component of cost which is being used so further determination of cost for work in progress and finished goods is greatly affected by the method of valuation technique used in material costing.