## FIFO (First-In, First-Out) Method
Under FIFO, the materials purchased first are issued first. Issues are therefore priced at the oldest purchase prices, while closing stock is valued at the most recent prices.
### Advantages
- Simple to understand and easy to operate.
- Material cost charged to production represents the actual historical cost.
- In a period of falling prices, FIFO gives better cost results.
- Closing stock is valued near the current market price (because it consists of the latest purchases).
### Disadvantages
- May cause clerical errors when prices fluctuate frequently.
- Cost variation between jobs over time, since issues are based on specific past purchase prices — identical jobs done at different times may show different material costs.
- In a period of rising prices, FIFO shows higher book profits while real profits are lower, making future purchases (at the now-higher prices) harder to fund.
### Quick logic to remember
- Rising prices → issues priced low (old stock) → cost understated → profit overstated; closing stock high.
- Falling prices → issues priced high (old stock) → cost results look better; closing stock near current low price.