What is a disadvantage of FIFO?

What is a disadvantage of FIFO?

• A. It is costly to implement
• B. It leads to highly variable ending inventory
• C. Issues to production will be valued out of date as it uses old prices
• D. It does not meet tax reporting requirements

Answer: (C)

The main idea here is how FIFO assigns costs. In FIFO, the oldest stock is issued to production first, so the cost attached to materials used in production reflects earlier, possibly lower prices. If prices have risen, those issued-to-production costs can be outdated, making the production cost figures less relevant for decision-making and planning because they don’t reflect current price levels. This mismatch is the key disadvantage of FIFO in such contexts.

The main idea here is how FIFO assigns costs. In FIFO, the oldest stock is issued to production first, so the cost attached to materials used in production reflects earlier, possibly lower prices. If prices have risen, those issued-to-production costs can be outdated, making the production cost figures less relevant for decision-making and planning because they don’t reflect current price levels. This mismatch is the key disadvantage of FIFO in such contexts.