FIFO ( inventory valuation )

Question 1

what is first in first out?
(inventory valuation)

Answer 1

this method is used to place a value on inventory issued to departments/ jobs/ customers and to value the closing inventory at the end of each month or year. It is based on cost price NOT selling price. Issues of inventory will be charged at the first price paid until all of that batch of inventory has been issued. Then the next batch will be issued at the price paid for that batch until all of that batch has been issued.

Question 2

describe 4 advantages of fifo

Answer 2

1. it is a logical method as goods will normally leave the business in date order - oldest to newest.
2. it is an easy method to operate and understand
3. the balance of inventory is always a true and fair valuation as it is the most recent inventory purchased which is left
4. It is accepted by the inland revenue for taxation purposes

Question 3

describe 2 disadvantages of fifo

Answer 3

1. Clerical errors may be made due to having to select inventory from different batches.
2. It is difficult to compare prices of jobs charged to customers as inventory for one job may have a different price to that the inventory of another job as it will come from different batches