Highest-in-first out (HIFO) Method
Under this method material issued are charged at the rate of highest priced materials in stores. This highest rate is continued to be used until material at that highest price is exhausted, after which the next highest price is used.
Thus, in HIFO method, the production absorbs the high cost of materials and closing stock is valued at lower rates.
The HIFO method has the advantage that in fluctuating market, the highest cost of materials is recovered first and inventory valuation is kept at the lowest which is tantamount to creating a secrete.
This method is not popular but is used ‘cost plus contracts with advantages.
HIFO Full Form – Highest-in-first out
Advantages of HIFO
The main advantage of this method are:
1. Under this method, the actual cost of materials issued is recovered from production as materials are issued at actual cost price.
2. Under this method, as the cost of lots purchased at higher prices are issued first and are recovered first from production, closing stock is valued at lower prices.
Disadvantages of HIFO
This method suffers from the following drawbacks:
1. This method is difficult to operate, as it involves various calculations not only with regard to issues but also stock.
2. As closing stock is valued at lower prices, there results in under valuation of closing stock and creation of secrete reserves.
3. Comparison of costs becomes difficult.
Suitability
This method is suitable for pricing of materials issued to cost plus contracts and monopoly product. But today, this method is not popular and it is not adopted widely.
The impact of this method over cost of production is that cost is overstated. On profit, its impact is under statement of profit .
On valuation of closing stock is impact is understatement of the value of stock and a hidden reserve is created in the valuation of stock.
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