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Cost and Management Accounting · Material Cost

Material Issue Pricing Methods: FIFO, LIFO and Weighted Average

Updated 4 October 2026 · Fact-checked

Material issue pricing decides the rate at which materials sent to production are charged when purchases come at different prices. FIFO charges the oldest lot first, LIFO the latest lot first, and weighted average uses the average rate of stock in hand. Record each receipt and issue in the stores ledger and price issues by the chosen rule.

Understand Material Issue Pricing Methods: FIFO, LIFO, Weighted Average

A store buys the same material at different prices on different dates. When you issue some of it to production, you must decide which price to charge. This is the material issue pricing problem. The physical material is the same. Only the cost you assign to the job or process changes.

Under FIFO (First-In, First-Out), you assume the oldest stock is issued first. Issues are charged at the oldest lot's price. Closing stock is made up of the latest purchases, so it is valued near current prices.

Under LIFO (Last-In, First-Out), you assume the latest stock is issued first. Issues are charged at recent prices. Closing stock is made up of the oldest purchases, so it can be valued at old prices.

Under weighted average, you mix all stock in hand into one pool. After every receipt, you divide the total value by the total quantity to get a new rate. All issues until the next receipt use that rate. Simple average just averages the purchase rates and ignores quantities, so it is less accurate.

When prices rise, FIFO gives a lower material cost and higher profit. LIFO gives a higher material cost and lower profit. Weighted average falls in between. When prices fall, the effect reverses. Total cost of materials purchased is the same under every method. Only the split between issues and closing stock changes. Note that AS 2 allows only FIFO or weighted average for valuing inventory in financial statements, but cost accounting questions still ask for LIFO.

Key rules to remember

FIFO rule
Issue from the oldest lot in stock first; move to the next oldest lot when it is exhausted
Closing stock is valued at the latest purchase prices.
LIFO rule
Issue from the latest lot received first; move back to earlier lots when it is exhausted
In a perpetual ledger, a new receipt becomes the first lot to be issued from. Closing stock carries the oldest prices.
Weighted average rate (perpetual)
Rate = Total value of stock after receipt ÷ Total quantity in stock after receipt
Recompute after every receipt. Issues do not change the rate.
Simple average rate
Rate = Sum of the rates ÷ Number of rates averaged
Ignores quantities. Use only when the question asks for it.
Stores ledger check
Opening stock value + Purchases value − Issues value = Closing stock value
Use it to check your work under any method.

How to solve Material Issue Pricing Methods: FIFO, LIFO, Weighted Average questions

Use this method for any stores ledger question. Work in a ledger with Receipts, Issues and Balance columns, each showing quantity, rate and amount.

  1. 1Read the method asked for: FIFO, LIFO, simple average or weighted average. Note whether returns or shortages are given.
  2. 2Enter the opening stock as the first balance, with quantity, rate and amount.
  3. 3Go date by date. For a receipt, add a new line in Receipts and add it to the Balance as a separate lot, or recompute the average for weighted average.
  4. 4For an issue, split it across lots as the method requires (FIFO oldest first, LIFO latest first). Write each part as quantity × rate.
  5. 5Update the Balance after every issue so that it shows the remaining lots with their quantities and rates.
  6. 6Handle special items: material returned to stores goes back at the issue rate; returned to supplier is deducted at purchase rate; shortages are adjusted in the balance.
  7. 7At the end, total the issues and the closing balance, and check that opening + purchases − issues = closing.
  8. 8Answer what is asked: issue cost, closing stock value, or the effect on profit. Write a short comparison if the question asks.

Quickest way: Lot-tracking shortcut with a final check

When to use it: Use it for stores ledger numericals and for MCQs on issue cost or closing stock under time pressure.

  1. For MCQs, ask whether prices are rising. If yes, FIFO gives the lowest issue cost and highest closing stock and profit. LIFO gives the opposite.
  2. For FIFO and LIFO, write the remaining lots as a short list like 100@10, 50@12 after each issue. Do not redraw the whole ledger.
  3. For weighted average, compute the new rate only at receipts. Reuse it for all issues until the next receipt.
  4. In the written answer, show every issue as quantity × rate on its own line. Step marks are given for the rate and for the amount.
  5. Always finish with the check: opening + purchases − issues = closing. If it fails, the error is in a lot split.

Common mistakes in Material Issue Pricing Methods: FIFO, LIFO, Weighted Average

  • Using the opening rate for the whole issue under FIFO even when the first lot is smaller than the issue.

    Students forget that the issue can span more than one lot.

    Fix: Issue the full quantity of the oldest lot, then take the balance from the next lot. Show each part separately.

  • Under LIFO, issuing from the oldest lot after a new purchase arrives.

    Students carry the previous balance forward instead of treating the new receipt as the latest lot.

    Fix: After each receipt, the latest lot sits on top. Issue from it first, then go back lot by lot.

  • Taking the simple average of rates when weighted average is asked.

    It is faster and looks similar.

    Fix: Weighted average = total value ÷ total quantity. Use quantities in the calculation.

  • Not recomputing the weighted average rate after a new receipt, or recomputing it after an issue.

    Students mix up when stock composition changes.

    Fix: Recompute only after receipts. An issue at the current average rate leaves the rate unchanged.

  • Closing stock does not reconcile with the ledger totals.

    A lot was left partly issued, or an amount was copied wrongly.

    Fix: Apply the check: opening + purchases − issues = closing stock value.

  • Stating that LIFO always gives the lowest profit.

    Students memorise the rising-price result as a universal rule.

    Fix: Say that LIFO gives a higher cost and lower profit when prices rise. When prices fall, the effect reverses.

Worked examples

Example 1

A store has the following transactions for a material in April. 1 April: Opening stock 100 units at ₹10. 5 April: Purchased 200 units at ₹12. 8 April: Issued 150 units. 15 April: Purchased 100 units at ₹14. 20 April: Issued 180 units. Using a perpetual stores ledger, find the cost of materials issued and the closing stock under (a) FIFO and (b) LIFO.

Show the solution
  1. Total value available = 100 × 10 + 200 × 12 + 100 × 14 = 1,000 + 2,400 + 1,400 = ₹4,800. Units available = 400. Units issued = 330. Closing units = 70.
  2. FIFO, 8 April issue of 150: 100 × 10 = 1,000 plus 50 × 12 = 600, so ₹1,600. Balance: 150 units at ₹12 = ₹1,800.
  3. FIFO, 15 April: add 100 at ₹14. Balance: 150@12 and 100@14.
  4. FIFO, 20 April issue of 180: 150 × 12 = 1,800 plus 30 × 14 = 420, so ₹2,220. Balance: 70 units at ₹14 = ₹980.
  5. FIFO total issues = 1,600 + 2,220 = ₹3,820. Check: 3,820 + 980 = 4,800.
  6. LIFO, 8 April issue of 150: stock is 100@10 and 200@12. Take 150 from the latest lot: 150 × 12 = ₹1,800. Balance: 100@10 and 50@12 = 1,000 + 600 = ₹1,600.
  7. LIFO, 15 April: add 100@14. Balance: 100@10, 50@12, 100@14.
  8. LIFO, 20 April issue of 180: 100 × 14 = 1,400, then 50 × 12 = 600, then 30 × 10 = 300. Total ₹2,300. Balance: 70 units at ₹10 = ₹700.
  9. LIFO total issues = 1,800 + 2,300 = ₹4,100. Check: 4,100 + 700 = 4,800.

Answer: FIFO: cost of issues ₹3,820 and closing stock ₹980. LIFO: cost of issues ₹4,100 and closing stock ₹700. Prices are rising, so LIFO gives a higher material cost (₹280 more) and a lower closing stock. Profit is lower under LIFO by the same ₹280.

Example 2

A firm records the following for a material. 1 June: Opening stock 200 kg at ₹50 per kg. 5 June: Purchased 300 kg at ₹60. 8 June: Issued 250 kg. 12 June: Purchased 250 kg at ₹64. 20 June: Issued 300 kg. Find the cost of each issue and the closing stock using the weighted average method (perpetual). Also state what the first issue would cost under simple average.

Show the solution
  1. After 5 June receipt: quantity = 200 + 300 = 500 kg. Value = 200 × 50 + 300 × 60 = 10,000 + 18,000 = ₹28,000. Rate = 28,000 ÷ 500 = ₹56 per kg.
  2. 8 June issue of 250 kg at ₹56 = ₹14,000. Balance: 250 kg, value 28,000 − 14,000 = ₹14,000 (rate still ₹56).
  3. 12 June receipt of 250 kg at ₹64 = ₹16,000. Balance: 500 kg, value 14,000 + 16,000 = ₹30,000. New rate = 30,000 ÷ 500 = ₹60 per kg.
  4. 20 June issue of 300 kg at ₹60 = ₹18,000. Balance: 200 kg, value 30,000 − 18,000 = ₹12,000.
  5. Total issues = 14,000 + 18,000 = ₹32,000. Check: opening 10,000 + purchases (18,000 + 16,000) = 44,000. Issues 32,000 + closing 12,000 = 44,000.
  6. Simple average for the 8 June issue: (50 + 60) ÷ 2 = ₹55 per kg. Cost = 250 × 55 = ₹13,750. It differs from ₹14,000 because it ignores quantities.

Answer: Weighted average: 8 June issue ₹14,000 at ₹56 per kg; 20 June issue ₹18,000 at ₹60 per kg; closing stock 200 kg valued at ₹12,000. Under simple average the first issue would cost ₹13,750.

Exam tips

  • Draw the stores ledger with quantity, rate and amount under Receipts, Issues and Balance. A clear layout earns step marks even if one figure is wrong.
  • Always show the split of an issue across lots as quantity × rate. Do not write only the total.
  • Do the closing check (opening + purchases − issues) before you move on. It catches most errors in a few seconds.
  • For MCQs on profit effect, find out whether prices are rising or falling before choosing. Remember that total purchase cost is the same under all methods.
  • Read carefully for returns to stores, returns to supplier and shortages. Questions often add them to test the treatment.

Practice questions from Material Cost

Material Issue Pricing Methods: FIFO, LIFO, Weighted Average in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Material Issue Pricing Methods: FIFO, LIFO, Weighted Average: frequently asked questions

What is the difference between FIFO and LIFO in cost accounting?

FIFO prices issues at the oldest lot first, so closing stock is at recent prices. LIFO prices issues at the latest lot first, so closing stock is at older prices. When prices rise, FIFO shows lower material cost and higher profit than LIFO.

How do I prepare a stores ledger account?

Make columns for Receipts, Issues and Balance, each with quantity, rate and amount. Start with opening stock, then enter each transaction by date. Price every issue by the given method and update the balance after each line.

Is weighted average the same as simple average?

No. Weighted average divides total stock value by total quantity, so it uses quantities. Simple average adds the rates and divides by their number, ignoring quantities. The two give different answers unless the lots are equal in size.

Does the weighted average rate change when materials are issued?

No. In the perpetual method, the rate changes only when a new receipt is added to stock. Issues are made at the current rate, so value and quantity fall in the same proportion.