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1 First In, First Out (FIFO)

This method assumes that the first set of items bought is the first set used. The cost of the last set of inventory
bought is used to value the inventory.

Advantages
(1) In periods of falling prices material costs (product costs) are overstated and profits are understated.
(2) Materials are issued at a prices actually paid for the stock.
(3) Closing stock values are based on the most recent prices.
(4) It is realistic because it is based on the assumption that issues from stock are made in the order in
which the goods are received.
(5) closing stock is valued acceptable for use by the Inland Revenue Department
(6) acceptable according to IAS 2

Disadvantages
(1) In periods of rising prices (inflation) product costs are understated and profits are overstated. This goes
against the prudence concept.
(2) Makes comparison between jobs difficult because the material issue price may vary from batch to batch.
(3) Issues from stock are not at the most recent prices paid and this could influence the costing of work done.

2 Last In First Out (LIFO)


This method assumes the last sets of items bought are the first to be used or sold. The cost of the first set of
inventory issued to value the inventory.

Advantages
(1) The value of closing stock is based on prices actually paid for the stock.
(2) Issues are valued at the most recent prices.

Disadvantages
(1) It is usually unrealistic because it is based on the assumption that the most recently acquired stock is used
or sold before the older stock.
(2) Identical items of stock may be issued to production (or sold) at different prices because they have been
taken from different batches of purchases.
(3) Closing stock is not valued at the most recent prices.
(4) This method is not acceptable for the purpose of IAS 2.
(5) Not acceptable for use by the Inland Revenue Department for tax purpose.

3 Weighted Average Cost (AVCO)


The cost and quantity of inventory is added to the cost and quantity of purchases and a new average cost found.
Total cost = average cost per unit multiplied by the total number of units.

Advantages
(1) Since prices are averaged it recognises that issues from stock have equal value to the business and variation
in prices are minimised.
(2) It allows comparison of profit figures to be made on a more realistic basis, since marked changes in the
price of stock issues is smoothed out.
(3) The value of closing stocks will be fairly close to the latest prices paid for purchases
(4) AVCO is acceptable for the purpose of IAS 2.

Disadvantages
(1) A new average must be calculated with every purchase of stock.
(2) The calculated average does not represent any price actually paid for the stock.