Chapter 2 – Understand the Costing Method

Chapter 2.6 – Advantage and Disadvantage of FIFO and Weighted Average Method

The table below shows the advantages and disadvantages of FIFO and the Weighted Average Method:

Issue FIFO Method Weighted Average Method
Advantage first inventory bought is the first inventory sell.
Tell the actual cost
useful for products that have shelf life such as groceries
sell the items ordered first, know exactly how much they cost and how much profit making.
If you are in manufacturing, you know the exact cost of the materials for each product as it is manufactured
set prices based on average inventory cost by simply marking up the average
a lower profit margin for inventory that was the most expensive
have a lower profit margin, make up for that with a higher profit margin on the lower-cost inventory.
This works well for companies that mix their inventory as it comes in.
Disadvantage lose or damage any inventory, need to know exactly where the loss in inventory is in order to know its value
FIFO gives different production costs for each product manufactured. If the materials for two units have different price,each of those units has a different cost.
If mark up costs to get selling price, units would have different selling prices.
particular product could have higher costs than the others,
return any inventory unsold, average cost becomes inaccurate.
selling the remaining inventory at too low a price to make a reasonable profit
decide to get rid of inventory by discounting it based on the average cost, could be selling some of it at a loss because it was actually more expensive than the rest of the