## FIFO — First-In, First-Out

Principle: Materials are issued in the order they were received — oldest stock goes out first.

### Price Used for Issues

The price of the earliest (oldest) batch in stock.

### Suitability

Falling prices: Old (higher) price charged to production; replacement cost is lower → production cost is realistically charged.
Rising prices: Old (lower) price charged to production → cost is understated; profit is overstated.

### Advantages and Disadvantages

Advantage	Disadvantage
Simple to understand and operate	Clerical errors likely when prices fluctuate often
In falling prices, closing stock reflects near-current market price	In rising prices, low charged cost → unreasonably high reported profit → higher income tax
Balance sheet not distorted (closing stock at recent prices)	—

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## LIFO — Last-In, First-Out

Principle: Most recently received materials are issued first — newest stock goes out first.

### Price Used for Issues

The price of the latest (newest) batch received → always close to current market price.

### Suitability

Rising prices: Issued cost reflects current market cost → realistic production cost and income measurement.

### Advantages and Disadvantages

Advantage	Disadvantage
Production cost reflects current market prices	Clerical errors likely with frequent price changes
In inflation: lower reported profit → avoids paying undue taxes	Different jobs may carry different material costs for the same item
In falling prices: issued cost falls → product becomes price-competitive	In falling prices: closing stock may need write-down to lower of cost or NRV
—	Closing stock valued at OLD prices → balance sheet distorted
—	Income tax authorities do not accept LIFO (closing stock ≠ current market value)

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## FIFO vs LIFO — Quick Comparison

Feature	FIFO	LIFO
Issues order	Oldest first	Newest first
Closing stock value	Recent / current prices	Older prices
COGS includes	Older purchase costs	Recent purchase costs
Balance sheet representation	Accurate (not distorted)	Distorted
Rising prices → Reported income	Higher (old low cost vs. current revenue)	Lower (current high cost vs. current revenue)
Tax impact in inflation	Higher tax liability	Lower tax liability
Accepted by Indian IT authorities	Yes	No

Worked example

### Example 1

FIFO vs LIFO in Rising Prices:

Purchases: Batch 1 — 100 units @ ₹10; Batch 2 — 100 units @ ₹15.

Issue: 100 units.

FIFO: Issues 100 units from Batch 1 @ ₹10 → Material cost = ₹1,000; Closing stock = 100 units @ ₹15 (current price).

LIFO: Issues 100 units from Batch 2 @ ₹15 → Material cost = ₹1,500; Closing stock = 100 units @ ₹10 (old price).

If selling price = ₹20/unit (revenue = ₹2,000):

Note: LIFO closing stock (₹1,000) is understated vs FIFO closing stock (₹1,500) → balance sheet distortion.

⚠️ Common exam mistakes

Confusing which method suits rising vs falling prices: FIFO suits falling prices (gives realistic high cost charge); LIFO suits rising prices (gives current cost charge).
Thinking FIFO overstates closing stock — FIFO gives the most current/accurate closing stock value, not an overstated one.
Forgetting that LIFO is not accepted by Indian income tax authorities, regardless of its costing merit.
Assuming higher profit is always better — in the context of inflation, FIFO's higher profit creates a higher tax burden on unrealised holding gains.

Reference:

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FIFO and LIFO Methods of Material Issue Valuation

Worked example