LIFO – Last In First Out

• Another benefit of LIFO costing is that it minimizes the unrealized gains and losses of inventory and industries facing fast material price fluctuations can stabilize their reported operating profits.

• As in LIFO costing current period inflationary prices of raw material are charged to cost of production and are deducted from revenues, therefore it reduces the profit figure resulting in tax savings. This cash saving advantage enhances the working capital of the firm.

Disadvantages of LIFO Costing

Following disadvantages are associated with LIFO costing method:

• Regulatory bodies often adopt strict measure as a check over LIFO method. In some cases LIFO costing technique is even restricted due to reduction in tax collections to the internal revenue services.

• Record keeping requirements under LIFO are substantially higher than any other method of inventory costing.

• Deterioration or decay of material is maximized due to early use of the latest purchases and latest use of the oldest receipts.

• The Cost Accounting Standards Board does not recognize the use of LIFO method except in some special cases.

Due to accelerated rate of inflation in the last few years the adoption of LIFO costing technique gained some appeal from industries but the decision to adopt LIFO should be taken abruptly without keeping its long term repercussions.