FIFO, an acronym for First In, First Out, is a concept in ways of organizing and manipulation of data proportionate to time and prioritization.
Meaning and definition
FIFO can be defined as a method for asset management and valuation which involves the first produced or acquired assets being sold, disposed of, or used first. FIFO is useful to an individual as well as a corporation.
Investopedia explains FIFO in the following manner. For the purpose of taxation, FIFO presumes that the remaining assets in the inventory are matched to the most recently produced or purchased assets. Due to this assumption, there are numerous strategies for tax minimization associated with the use of FIFO asset management and evaluation method.
Advantages and disadvantages of FIFO Method
The key advantages of FIFO method are mentioned below:
- The key advantage of FIFO method lies in its being simple and easy to understand and operate.
- It is a coherent method for it takes into consideration the normal procedure of utilizing the first received materials being used first. Materials are issued in the order of purchases, and thus the materials used first are utilized first.
- Under the FIFO Method, the materials are issued at the purchase value thus helping in the cost of work orders or a job being correctly determined as far as the materials’ cost is concerned.
- This method is also helpful in failing prices.
- Closing stock of materials is evaluated at the market price since it would consist of recent purchase of materials.
- The FIFO method is also useful when there are not many transactions and the prices of materials are also moderately steady.
In addition to the aforesaid advantages, the FIFO method also features certain disadvantages like:
- The FIFO method leads to an increase in the risk of clerical errors.
- In case of fluctuating prices of materials, it becomes difficult to compare two jobs as the one started a few minutes prior to the other featuring similar behavior might receive materials at different prices.
- During price hike, the issue price doesn’t reflect the market price since the materials are issued from the first consignments.