FIFO (first in first out) method is considered suitable in times of falling price?

Question

how suitable in falling price time?...

for an example if price in Jan is 100 and Feb is 80. Here price falling.

In FIFO method we use 100 price material first.. so material cost charged to production will be high. Because now the repalcement cost is 80 , cheap.Then how can we say FIFO gives better results in the case of falling prices... please explain..

Answer 1

If prices are falling from say, 100 per unit to 80 per unit, it means that your Cost of Sales will be less, than the previous month, and this will give a higher profit figure.

e.g

Jan: Sales 200

   Cost of Sales 100

Profit 100

Feb: Sales 200

  Cost of Sales 80

Profit 120

Get it? So it just makes the books look better. It doesn't really mean that you're in a better trading position than you were last month.

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