First in First Out or FIFO
FIFO method is based upon the assumption such stock purchased first is issued first. Prices of stock purchased first are employed to determine the value or cost of inventory issued. Closing stocks are carried on the latest costs.
1. This is a realistic system: as oldest items are generally issued first out.
2. Unrealized losses or profits do not happen
3. This is easy to calculate whether prices of materials don't fluctuate
4. Such closing stocks values reflect the latest costs hence tend to reflect the recent market values.
5. This is acceptable to many tax authorities and is consistent also along with accounting practices as like IAS/IFRS.
1. It includes tedious calculations whether the price of materials fluctuate from time to time
2. The product costs, based upon the oldest material prices, lag behind recent conditions especially into inflationary markets.
3. Comparison about one job along with another may be difficult whether materials are issued on various prices.