Companies must use First in, first out (FIFO) method for inventory if they are selling perishable goods such as food, which expires after a certain period of time. Companies -selling products with relatively short demand cycles, such as designer fashion, also may have to pick FIFO to ensure they are not stuck with outdated styles in inventory.
This method of material issue is considered to be most suitable in times when the prices in market show declining trend because the higher price of material purchased earlier is recovered and the closing stock is valued at the current market price.
The use of FIFO method,
- It is simple to understand and easy to operate.
- It is a logical method as the materials purchased earlier are used in earlier jobs.
- Materials arc issued at the purchase price, so the cost of materials is
- Stock is valued at the recent purchase prices, and hence closing stock is valued at the current market price.
- This method is useful when prices are falling as the materials are charged to job or work orders at cost.
- This method is suitable when the items are bulky, slow moving and