Advantages and Disadvantages of Inventory Costing

Question 1

FIFO (Advantages)

Answer 1

1. Conforms to normal expectations i.e. the oldest items of materials are issued first
2. Closing inventory valuation is likely to be reasonably reflective of current prices as it represents the latest purchases

Question 2

FIFO (Disadvantages)

Answer 2

1. Requires detailed calculations
2. Depending on when the latest purchases of materials occurred, closing inventory valuations may not reflect current prices

Question 3

LIFO (Advantages)

Answer 3

1. Value of materials issued generally reflective of current prices

Question 4

LIFO (Disadvantages)

Answer 4

1. Requires detailed calculations
2. Closing inventory valuation is generally based on out-dated prices
3. Not accepted by Revenue or allowed under FRS 102

Question 5

AVG (Advantages)

Answer 5

1. Smooths out fluctuations that occur as cost prices change

Question 6

AVG (Disadvantages)

Answer 6

1. Issue price and inventory value may not be an actual price (they will be average prices)
2. Closing inventory valuations may still be based on out-dated prices