Q.State the advantages and limitations of the FIFO and LIFO methods of pricing materials issued.

FIFO and LIFO make opposite assumptions about which lot leaves the store first, and this drives their opposite advantages and limitations.

FIFO is simple, follows the natural physical flow of most materials, and values closing stock close to current cost — but in a period of rising prices it charges production with older, cheaper material, potentially overstating profit. LIFO charges production with the most recent, current cost — better matching current cost to cur …

FIFO (First-in-First-out):

Advantages:

1. Simple and logical — it follows the natural physical flow of most materials (oldest stock genuinely used first, avoiding spoilage).
2. Closing stock is valued very close to current/replacement cost, since it consists of the most recently purchased lots.
3. Widely accepted for both costing purposes and financial-statement preparation.

Limitations:

1. In a period of RISING prices, FIFO charges production with the cost of OLDER, cheaper material, which can show an inflated profit that does not reflect the higher cost of replacing that material.
2. Comparing the cost of two identical jobs done at different points in time becomes harder, since each is charged at whatever happened to be the oldest rate at that time.

LIFO (Last-in-First-out):

Advantages:

1. In a period of RISING prices, LIFO charges production with the cost of the most RECENT, current material, which better matches current cost against current revenue for decision-making and pricing purposes.
2. Tends to reduce notional/paper profit in a period of rising prices (though the tax treatment of this varies by jurisdiction and is outside this chapter's scope).

Limitations: …

Students often state FIFO's advantage and LIFO's limitation as though they were unrelated facts, missing that they are essentially MIRROR IMAGES of the same rising-price effect — FIFO's old cost charged to production is exactly why LIFO instead charges current co …