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Comparison of FIFO& LIFO methods, Next-in-First out (NIFO) Method Homework Help, Tutoring
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Comparison of FIFO& LIFO methods, Next-in-First out (NIFO) Method Assignment / Homework Help
Comparison of FIFO& LIFO methods

     The following are the points of distinction:

     (1) In case of FIFO, the materials which are received first are issued first, where as in case of LIFO, the materials which are received last are issued first.

     (2) In conditions of rising prices, due to difference in values of closing stock, better profit is given by FIFO than LIFO. But opposite will be result in conditions of falling prices.

     (c) Emphasis on the balance sheet is placed by FIFO where as emphasis on the income statement (i.e. profit & loss account) is placed by LIFO. FIFO should be chosen by anybody, who desires that inventory should correspond to the current cost. On the other hand, LIFO should be chosen by another whom desires that the current cost should be matched with the revenue.

     (3) Current cost is not matched with current revenue by FIFO but in the balance sheet, the working capital is correctly shown by it. Whereas, on the other hand, current cost is matched with current revenue by LIFO but the working capital is shown incorrectly. In that case, since matching is very essential, LIFO may be used, but by way of footnote, the current costs of the closing stock may be mentioned so that the working capital position is made clear.

1(B)(iii) Highest-in-First out (HIFO) Method:

       The method may be termed Highest-in-first-out or HIFO simply, when it is desired to charge the issues at the highest cost of purchase in stock so that purchases made at lower rates may be represented by the closing stock. No importance is gained by this method.  The application of this method may be noticed only in monopoly concerns & in case of cost plus costing. Since lower cost is represented by the closing stock, it helps to create secret reserve. Under this method, comparison of costs, as in the case of FIFO & LIFO, becomes unreliable.

1(B)(iv) Next-in-First out (NIFO) Method:

      Under this method, at the rate of next price, which is yet to arrive, the issue is charged. To see that the charge corresponds to the market price is the object of this method. Thus this is similar to market price method, but as the rate of next purchase can be easily known from the purchase order placed, the application of this method is easier than that method. If due to any reason whatsoever, at the time of making the payment, the rate of next purchase is changed, the complications will arise. For general application, the method has not been accepted. As in the case of FIFO, LIFO & HIFO, comparison of costs becomes unreliable.

1(B)(v) Base Stock Method:

        A fixed quantity of materials is always maintained at original cost under this method & out of the stock in excess of that fixed quantity, all issues take place using either FIFO principle or LIFO principle. The fixed quantity so maintained at original cost is called base stock. It is obvious that, if such a situation arises, where the production flow will be stopped, unless the issue is made out of the base stock, the issue has to be made; otherwise, the purpose of maintaining the base stock will be lost. The base stock will be permanently reduced in such an exceptional case.

Base stock should not be considered as independent method since either FIFO or LIFO principle is to be used. As a separate technique only, this method may be regarded. Normally, in base stock technique, FIFO is used
.
Advantages:

(a) This technique may be suitably used by process industries like leather industry, refinery, non-ferrous metal industry etc. where basis raw materials are used.
(b) This technique is applicable in industries where, for a long time, a considerable quantity of basic material is to be kept in process.
(c) The valuation of closing stock becomes easy by this technique.
(d) In both theory & practice, the technique is simple.
(e) The mode of closing stock valuation makes the profit or loss most conservative.

Disadvantages:

 (a) In this case, all the disadvantages of FIFO or LIFO, whichever is used in base stock technique, shall apply.
(b) Base stock is a part of the stock of materials which is an item of current asset. Therefore, why in the balance sheet, the base stock is treated as an item of fixed asset & shown at original cost?
(c) Sometimes in the balance sheet, base stock appears at most unbelievable price & as a result, at the time of winding up, the partners & shareholders may be cheated.

Illustration 3:

Prepare a stores ledger account assuming that a base stock of 600 units @ $ 5 per unit is maintained & FIFO method is applied on the basis of the following records of the receipts & issues of materials in March 2011.

March  01        Purchased        4000 units @ $ 5
            08        Issued              1200 units
            12        Purchased        2000 units @ $ 6
            15        Issued              2400 units
            19        Issued                600 units
            25        Purchased        2400 units @ $ 5.50
            27        Issued              2600 units
            30        Purchased        1400 units @ $ 6.50
           

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