Advantages of FIFO

Advantages Of FIFO
1. FIFO method is simple to understand and easy to operate. 2. FIFO method is suitable for bulky materials with high unit prices. 3. It is a logical method because it takes into consideration the normal procedure of utilizing first those materials which are received first. Materials are issued in order of purchases, so materials received first are utilized first. 4. Under this method, materials are issued at the purchase price; so the cost of jobs or work orders is correctly ascertained so far as cost of materials is concerned. Thus, the method recovers the cost price of the materials. 5. This method is useful when prices are falling. 6. Closing stock of materials will be valued at the market price as the closing stock under this method would consist of recent purchase of materials. This method is also useful when transactions are not too many and prices of materials are fairly steady.
Disadvantages Of FIFO
1. FIFO method is improper if many lots are purchased during the period at different prices. 2. This method increases the possibility or clerical errors, if consignments are received frequently at fluctuating prices as very time an issue of materials is made, the store ledger clerk will have to go through his record to ascertain the price to be charged. 3. In case of fluctuations in prices of materials, comparison between one job and the other job becomes difficult because one job started a few minutes later than another of the same nature may be issued materials at different prices, merely because the earlier job exhausted the supply of the lower priced materials in stock. 4. For pricing rise, the issue price does not reflect the market price as materials are issued from the earliest consignments. Therefore, the charge to production is low because the cost of replacing the material consumed will be higher than the price of issue.
Advantages Of LIFO
1. The cost of materials issued will be either nearer to and or will reflect the current market price. Thus, the cost of goods produced will be related to the trend of the market price of materials. Such a trend in price of materials enables the matching of cost of production with current sales revenues. 2. The profit shown here is relatively lower because the cost of production takes into account the rising trend of material prices. 3. In the case of falling prices profit tends to rise due to lower material cost, yet the finished products appear to be more competitive and are at market price. 4. Over a period, the use of LIFO helps to iron out the fluctuations in profits. 5. In the period of inflation LIFO will tend to show the correct profit and thus avoid paying undue taxes to some extent.
Disadvantages Of LIFO:
1. Calculation under LIFO system becomes complicated and cumbersome when frequent purchases are made at highly fluctuating rates. 2. Costs of different similar batches of production carried on at the same time may differ a great deal. 3. In time of falling prices, there will be need for writing off stock value considerably to stick to the principle of stock valuation, i.e., the cost or the market price whichever is lower. 4. This method of valuation of material is not acceptable to the income tax authorities.
Highest in First _Out (HIFO) Method. Advantages :

1. Production is at the high cost of production and during fluctuating prices the highest cost is recovered first . 2. Inventory value is kept low and results in secret reserve. 3. Used in cost plus contracts.
Disadvantages:
1. Results in secret reserve. 2. Unrealised profit or loss arises. 3. Production is not valued at current prices.
Advantages of Standard Costing System:

1. The use of standard costs is a key element in a management by exception approach. If costs remain within the standards, Managers can focus on other issues. When costs fall significantly outside the standards, managers are alerted that there may be problems requiring attention. This approach helps managers focus on important issues. 2. Standards that are viewed as reasonable by employees can promote economy and efficiency. They provide benchmarks that individuals can use to judge their own performance. 3. Standard costs can greatly simplify bookkeeping. Instead of recording actual co0sts for each job, the standard costs for materials, labor, and overhead can be charged to jobs. 4. Standard costs fit naturally in an integrated system of responsibility accounting. The standards establish what costs should be, who should be responsible for them, and what actual costs are under control.
Disadvantages / Problems / Limitations of Standard Costing System:

1. Standard cost variance reports are usually prepared on a monthly basis and often are released days or even weeks after the end of the month. As a consequence, the information in the reports may be so stale that it is almost useless. Timely, frequent reports that are approximately correct are better than infrequent reports that are very precise but out of date by the time they are released. Some companies are now reporting variances and other key operating data daily or even more frequently. 2. If managers are insensitive and use variance reports as a club, morale may suffer. Employees should receive positive reinforcement for work well done. Management by exception, by its nature, tends to focus on the negative. If variances are used as a club, subordinates may be tempted to cover up unfavorable variances or take actions that are not in the best interest of the company to make sure the variances are favorable. For example, workers may put on a crash effort to increase output at the end of the month to avoid an unfavorable labor efficiency variance. In the rush to produce output quality may suffer. 3. Labor quantity standards and efficiency variances make two important assumptions. First, they assume that the production process is labor-paced; if labor works faster, output will go up. However, output in many companies is no longer determined by hw fast labor works; rather, it is determined by the processing speed of machines. Second, the computations assume that labor is a variable cost. However, direct labor may be essentially fixed, then an undue emphasis on labor efficiency variances creates pressure to build excess work in process and finished goods inventories. 4. In some cases, a "favorable" variance can be as bad or worse than an "unfavorable" variance. For example, McDonald's has a standard for the amount of hamburger meat that should be in a Big Mac. A "favorable" variance would mean that less meat was used than standard specifies. The result is a substandard Big Mac and possibly a dissatisfied customer.
5. There may be a tendency with standard cost reporting systems to emphasize meeting the standards to the exclusion of other important objectives such as maintaining and improving quality, on-time delivery, and customer satisfaction. This tendency can be reduced by using supplemental performance measures that focus on these other objectives. 6. Just meeting standards may not be sufficient; continual improvement may be necessary to survive in the current competitive environment. For this reason, some companies focus on the trends in the standard cost variances - aiming for continual improvement rather than just meeting the standards. In other companies, engineered standards are being replaced either by a rolling average of actual costs, which is expected to decline, or by very challenging target costs.
Replacement Price Method. Advantages:

1. Simple to operate 2. Production reflects the current market price. 3. When the company has bought the goods at a cheap prices earlier in a large stock and the benefit need not be passed on to the customer ,then this method will reflect profit as the production will reflect the current prices .
Disadvantages:
1. The stock valuation is not at the current prices. 2. Unrealised profit or loss will arise. 3. It involves finding the replacement price at each issue and hence a little difficult to operate.
Advantages Of Perpetual Inventory System

* Perpetual inventory system provides an opportunity to verify the physical stock of materials. * Perpetual inventory system helps in rapid stock checking which, in turn, helps in the preparation of interim accounts. * A moral check on the store staff to maintain proper stock records. * The investment in materials and supplies may be kept at the lowest point. * It is not necessary to stop the production so as to carry out a complete physical stocktaking. * Perpetual inventory system helps to avoid deterioration, obsolescence etc. * Perpetual inventory system helps to discover or find out discrepancies and errors and remedial action can be taken quickly. * Timely replenishment of stock is facilitated by means of recording the level specified in the bin card.
Advantages of continuous stock-taking are :

1. Closure of normal functioning is not necessary. 2. Whole time specialized staff can be engaged for the purpose since the work is spread throughout the year. In smaller concerns, duties may be assigned to various officers of middle rank by rotation to the checking, say, of 20 items. This would be easy because the store ledger card and the bin card will bear the bin number. The officers concerned need only walk up to the particular bin number, count, weigh or measure the article lying there and enter the quantity on the form provided for the purpose. The rest of the work (comparison with book figures) can be done by the stores ledger clerk. 3. Stock discrepancies are likely to be brought to the notice and corrected much earlier than under the annual stock-taking system. 4. The system generally has a sobering influence on the stores staff because of the element of surprise present therein. 5. The movement of stores items can be watched more closely by the stores auditor so that chances of obsolescence buying are reduced. 6. Final Accounts can be ready quickly. Interim accounts are possible quite conveniently.

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Advantages Of FIFO

Highest in First _Out (HIFO) Method. Advantages :

Advantages of Standard Costing System:

Disadvantages / Problems / Limitations of Standard Costing System:

Replacement Price Method. Advantages:

Advantages Of Perpetual Inventory System

Advantages of continuous stock-taking are :

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