Advantages of FIFO

i. FIFO method is easy to understand and operate.

ii. FIFO method is useful where transactions are not voluminous and prices of
materials are falling.
iii. FIFO method is suitable for bulky materials with high unit prices.
iv. FIFO method helps to avoid deterioration and obsolescence.
v. Value of closing stock of materials will reflect the current market price.

Disadvantages Of FIFO
i. FIFO method is improper if many lots are purchased during the period at different
prices.
ii. The objective of matching current costs with current revenues can not be achieved
under FIFO method.
iii. If the prices of materials are rising rapidly, the current production cost may be
understated.
iv. FIFO method overstates profit especially in inflation.

Advantage of weighted average method

i. The weighted average method minimizes the effect of unusual high and-low
material prices.
ii. The weighted average method is practical and suitable for charging cost of
material used to production.
iii. It is useful for management in analyzing of operating results.
iv. This method is simple to apply if receipts of material are not numerous.
v. It gives most satisfactory results in periods of wide fluctuations in prices as
variation in prices are minimized.
vi. It gives the second highest values for both inventory and cost of goods sold; the
situation will be the same even if prices are falling.
vii. This is acceptable to the Inland Revenue.
viii. Due to use of average prices, comparison between profits of different periods
becomes easier and realistic.
ix. As the price paid for most recently purchased, plays significant role in calculating
average cost, so value assigned to closing inventory units is fairly closed to the
current market value.
x. It values identical items at the same cost even if they are purchased at different
prices and different dates.
Disadvantages of weighted Average Method
i. Materials used may not be charged to production at the current price.
ii. The cost charged to production is not the actual prices.
iii. If the receipts are numerous, many calculations are required.
iv. Prices used to value inventories may bear no relationship to any price actually
paid to suppliers.
v. The number and complexity of the calculations with AVCO can create rounding
off problem which increases the risk of error.

Example:
April 01: Inventories on hand: 50 units at the rate of $2 and 100 units at the rate of $4.50

April 05: Purchased 100 units at a rate of $1.80

April 06: 10 units of the inventories purchased on 5th April at the rate of $1.80 are returned
to supplier

April 10: 80 units were issued to factory

April 15: 50 units were issued to factory

April 20: 20 units were purchased at the rate of $1.50

April 25: 70 units were issued to factory

April 30: 50 units purchased at $1.70

Determine the cost of inventory on 30th April, under weighted average method of costing.