The Advantages and Disadvantages of LIFO Method In Cost Accounting.
The following are the Advantages of LIFO Method:
- Like FIFO method, this is simple to operate and is useful when transactions are not too many and the prices are fairly steady.
- Like FIFO, this method recovers cost from production because actual cost of material is charged to production.
- Production is charged at the recent prices because materials are issued from the latest consignment. Thus, effect of current market prices of materials is reflected in the cost of sales provided the materials are recently purchased.
- In time of rising prices, LIFO method of pricing issues is suitable because materials are issued at the current market prices which are high. This method thus helps in showing a lower profit because of increased charge to production during periods of rising prices and lower reduces burden of income tax.
The following are the Disadvantages of LIFO Method:
- Like FIFO, this method may lead to clerical errors as every time an issue is made, the store ledger clerk will have to go through the record to ascertain the price to be charged.
- Like FIFO, comparison between one job and the other job will become difficult because one job started a few minutes after another of the same type may bear a different charge for materials consumed, merely because the earlier job exhausted the supply of the lower priced or higher priced materials in stock.
- For pricing a single requisition, more than one price has often to be adopted.
- The stock in hand is valued at price which does not reflect current market price. Consequently, closing stock will be understated or overstated in the Balance Sheet.