The method assumes that the goods issued are those which have been longest on hand and that those remaining in stock represent the latest purchases or production.
The stocks whose cost is to be carried forward were acquired or produced most recently.
NB: materials are issued at the cost price of that consignment which was received first. When this consignment is finished, then cost price of next consignment is finished, then cost price of next consignment is charged to value the materials issued.
This method is based on the assumption that stock purchased first is issued first. Prices of stock purchased first are used to determine the cost or value of inventory issued. Closing stocks are carried at the latest costs.
Advantages
1. It is a realistic system: oldest items are usually issued first out.
2. Unrealized profits or losses do not arise
3. It is easy to calculate if prices of materials don’t fluctuate
4. Closing stocks values reflect the latest costs thus tend to reflect the current market values.
5. It is acceptable to many tax authorities and is also consistent with accounting practices e.g. IAS/IFRS.
Disadvantages
1. It involves tedious calculations if the price of materials fluctuate from time to time
2. Product costs, based on the oldest material prices, lag behind current conditions especially in inflationary markets.
3. Comparison of one job with another may be difficult if materials are issued at different prices.
Wilfykil answered the question on April 17, 2019 at 06:39
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