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Cost Accounting · Material Costs

FIFO, LIFO and Weighted Average Material Issue Pricing

Updated 10 October 2026 · Fact-checked

Material issue pricing decides the rate at which materials leave the store for production. FIFO prices issues at the oldest receipts first, LIFO at the latest receipts first, and weighted average at total value divided by total quantity. Record each receipt and issue in a stores ledger and check that issues plus closing stock equal total receipts.

Understand Material Issue Pricing Methods (FIFO, LIFO, Weighted Average)

Materials are bought at different prices on different dates. When you issue them to production, you must decide which price to charge. That choice changes the cost of production, the profit, and the value of closing stock. The physical material is the same either way. Only the cost attached to it changes.

The stores ledger account is where you do this. It has three blocks: receipts, issues and balance. Each line shows quantity, rate and amount. The balance block always shows what is left in stock and its value.

Under FIFO (First In First Out), you assume the oldest stock goes out first. Issues carry old prices, so closing stock carries the latest prices. Under LIFO (Last In First Out), you assume the newest stock goes out first. Issues carry recent prices, and closing stock carries the oldest prices. LIFO is a costing assumption for exam problems. Ind AS 2 does not permit LIFO for financial reporting.

Under weighted average, you charge every issue at one average rate. In a perpetual stores ledger, you recalculate this rate after every receipt: balance value ÷ balance quantity. Simple average just averages the receipt rates without using quantities, so it can misstate cost. Under the standard price method, you issue at a predetermined price and show the difference from actual purchase price as a price variance when you receive the material.

When prices rise, FIFO gives lower issue cost and higher closing stock, so it shows higher profit. LIFO gives the opposite. When prices fall, the effects reverse. Weighted average falls in between. ICMAI expects you to state this effect when a question asks for comments.

Key rules to remember

FIFO issue rule
Issue from the earliest receipt lots first, in order, until the issue quantity is met
Closing stock is made up of the latest lots.
LIFO issue rule
Issue from the latest receipt lot on hand first, then move back to earlier lots
In a perpetual ledger, 'latest' means latest lot on hand on the date of issue, not the latest of the whole period.
Weighted average rate (perpetual)
Rate = Value of stock on hand ÷ Quantity on hand, recalculated after each receipt
Issues do not change the rate. Receipts do.
Weighted average rate (periodic)
Rate = (Opening stock value + Receipts value) ÷ (Opening quantity + Receipts quantity)
Use only when the question asks for one rate for the whole period.
Simple average rate
Rate = Sum of receipt rates ÷ Number of receipt rates
Ignores quantities. Issues plus closing stock may not equal total receipts.
Standard price method
Material price variance = (Standard price − Actual price) × Quantity received
Positive means favourable when actual price is below standard. Issues are charged at standard price.
Stores ledger check
Opening stock value + Receipts value = Issues value + Closing stock value
Holds for FIFO, LIFO and perpetual weighted average. Always verify it.

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

Use this method for any stores ledger problem. It keeps the work in order and gives you step marks.

  1. 1Read the method asked: FIFO, LIFO, weighted average, simple average or standard price. Note whether the question wants perpetual (after each transaction) or periodic treatment.
  2. 2List all transactions in date order: opening stock, receipts with rates, and issues. Note any returns to store or returns to supplier.
  3. 3Draw the stores ledger with receipt, issue and balance blocks, each with quantity, rate and amount.
  4. 4Process each date. For a receipt, add a lot to the balance. For an issue, take quantity from the correct lots as the method requires, and split the issue line if it uses more than one rate.
  5. 5For weighted average, recalculate the rate after every receipt as balance value ÷ balance quantity, and price issues at that rate.
  6. 6After each line, update the balance by lot (FIFO and LIFO) or by total (average).
  7. 7Total the issue amounts and find closing stock quantity and value.
  8. 8Check that opening value plus receipts equals issues plus closing stock. Then write the comment the question asks for, such as the effect on profit.

Quickest way: Lot-tracking shortcut for FIFO and LIFO

When to use it: Use when you have limited time and the ledger has three or more receipts. It saves rewriting the full balance block each time.

  1. Write the lots in a small list on the side, each as quantity @ rate.
  2. For each issue, strike off quantity from the lots in the order the method needs, and note the amounts.
  3. Add the amounts for the issue line. Rewrite only the remaining lots.
  4. For weighted average, keep just two running numbers: balance quantity and balance value. Divide only when you need a rate.
  5. Finish with the check: opening + receipts = issues + closing.

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

  • Using the latest receipt of the whole period for a LIFO issue, even when that receipt has not yet arrived on the issue date.

    Students apply LIFO as a period-end idea rather than lot by lot on each date.

    Fix: In a perpetual ledger, on each issue date use only lots already on hand, newest first.

  • Averaging the rates of receipts (simple average) when the question asks for weighted average.

    Both look like averages and simple average is faster.

    Fix: Weight each rate by quantity. Divide total value by total quantity.

  • Not recalculating the weighted average rate after a new receipt.

    Students keep the old rate because the previous issue used it.

    Fix: Recalculate after every receipt. An issue does not change the rate.

  • Pricing a single issue at one rate when it spans two lots.

    Students rush and take the whole issue from the first lot.

    Fix: Split the issue into two or more lines when the first lot is exhausted. Each line has its own rate.

  • Closing stock value not agreeing with the ledger balance.

    An arithmetic slip in an earlier line carries forward unnoticed.

    Fix: Run the check: opening + receipts = issues + closing. If it fails, find the line where the balance stopped agreeing.

  • Writing the wrong profit effect in a comment, such as saying FIFO gives lower profit when prices rise.

    Students confuse which lots go to issues and which stay in stock.

    Fix: Remember: rising prices, FIFO charges old low prices to production, so cost is lower and profit higher. LIFO is the reverse.

Worked examples

Example 1

A store records these transactions for material X: 1 April opening stock 100 units @ ₹10; 5 April receipt 200 units @ ₹13; 10 April issue 150 units; 15 April receipt 100 units @ ₹14; 20 April issue 180 units. Prepare the stores ledger values using FIFO, LIFO and perpetual weighted average. Find the total cost of issues and closing stock value under each.

Show the solution
  1. Closing quantity = 100 + 200 + 100 − 150 − 180 = 70 units. Total receipts value including opening = ₹1,000 + ₹2,600 + ₹1,400 = ₹5,000.
  2. FIFO, 10 April: 100 units @ ₹10 = ₹1,000 and 50 units @ ₹13 = ₹650. Issue = ₹1,650. Balance: 150 units @ ₹13.
  3. FIFO, 15 April receipt adds 100 @ ₹14. 20 April: 150 @ ₹13 = ₹1,950 and 30 @ ₹14 = ₹420. Issue = ₹2,370. Total FIFO issues = ₹1,650 + ₹2,370 = ₹4,020. Closing: 70 @ ₹14 = ₹980. Check: ₹4,020 + ₹980 = ₹5,000.
  4. LIFO, 10 April: 150 units from the 200 @ ₹13 lot = ₹1,950. Balance: 100 @ ₹10 and 50 @ ₹13.
  5. LIFO, 15 April adds 100 @ ₹14. 20 April: 100 @ ₹14 = ₹1,400, 50 @ ₹13 = ₹650, 30 @ ₹10 = ₹300. Issue = ₹2,350. Total LIFO issues = ₹1,950 + ₹2,350 = ₹4,300. Closing: 70 @ ₹10 = ₹700. Check: ₹4,300 + ₹700 = ₹5,000.
  6. Weighted average, after 5 April: 300 units, value ₹1,000 + ₹2,600 = ₹3,600, rate ₹12. 10 April issue 150 × ₹12 = ₹1,800. Balance 150 units, ₹1,800.
  7. After 15 April: 250 units, value ₹1,800 + ₹1,400 = ₹3,200, rate ₹12.80. 20 April issue 180 × ₹12.80 = ₹2,304. Balance 70 units, ₹896. Total issues = ₹1,800 + ₹2,304 = ₹4,104. Check: ₹4,104 + ₹896 = ₹5,000.

Answer: FIFO: issues ₹4,020, closing stock ₹980. LIFO: issues ₹4,300, closing stock ₹700. Weighted average: issues ₹4,104, closing stock ₹896. Prices rose, so LIFO gives the highest issue cost and lowest closing stock, FIFO the reverse, and weighted average lies between.

Example 2

A firm buys material Y: 1 January 100 units @ ₹40; 8 January 200 units @ ₹44; 15 January 200 units @ ₹51. There is no opening stock. On 20 January 250 units are issued. Find the issue value and closing stock value using FIFO, simple average and weighted average. Comment on the simple average result.

Show the solution
  1. Total receipts = ₹4,000 + ₹8,800 + ₹10,200 = ₹23,000 for 500 units.
  2. FIFO: 100 @ ₹40 = ₹4,000 and 150 @ ₹44 = ₹6,600. Issue = ₹10,600. Closing 250 units = 50 @ ₹44 + 200 @ ₹51 = ₹2,200 + ₹10,200 = ₹12,400. Check: ₹10,600 + ₹12,400 = ₹23,000.
  3. Simple average rate = (₹40 + ₹44 + ₹51) ÷ 3 = ₹135 ÷ 3 = ₹45. Issue = 250 × ₹45 = ₹11,250. Closing at the same rate = 250 × ₹45 = ₹11,250.
  4. Weighted average rate = ₹23,000 ÷ 500 = ₹46. Issue = 250 × ₹46 = ₹11,500. Closing = 250 × ₹46 = ₹11,500. Check: ₹11,500 + ₹11,500 = ₹23,000.
  5. Simple average: ₹11,250 + ₹11,250 = ₹22,500, which is ₹500 less than the ₹23,000 spent. The method ignores that more units were bought at higher rates.

Answer: FIFO: issue ₹10,600, closing stock ₹12,400. Simple average: issue ₹11,250, closing stock ₹11,250. Weighted average: issue ₹11,500, closing stock ₹11,500. Simple average does not reconcile with total purchase cost, so weighted average is the reliable averaging method.

Exam tips

  • Always draw the full stores ledger with receipt, issue and balance blocks. Marks are given for the layout and for each line, not only the final figure.
  • Split issues that span two lots into separate lines. Examiners look for the quantity and rate on each line.
  • Run the check: opening + receipts = issues + closing. It takes ten seconds and catches most errors.
  • Read whether the question says perpetual or periodic. Many students lose marks by using one weighted average rate for the whole period when a ledger needs a rate after each receipt.
  • For MCQs, the usual trap is the profit or closing stock effect under rising prices. Decide which lots go out, then reason from there.

Practice questions from Material Costs

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 issues the oldest stock first, so issues carry old prices and closing stock carries the latest prices. LIFO issues the newest stock first, so issues carry recent prices and closing stock carries the oldest prices. When prices rise, FIFO shows higher profit and LIFO lower profit.

How do I prepare a stores ledger account?

Make columns for receipts, issues and balance, each with quantity, rate and amount. Enter transactions in date order and update the balance after each one. Price issues using the method asked, and finish by checking that issues plus closing stock equal opening stock plus receipts.

When do I recalculate the weighted average rate?

In a perpetual ledger, recalculate after every receipt using balance value ÷ balance quantity. Issues are made at the current rate and do not change it. In a periodic method, you calculate one rate for the whole period from total value and total quantity.

What is the difference between simple average and weighted average?

Simple average adds the receipt rates and divides by the number of rates, ignoring quantities. Weighted average divides total value by total quantity. Weighted average reconciles with total purchase cost, while simple average may not.

Which method should I use if the question does not say?

Use the method named in the question. If it asks for all methods, do each separately in its own ledger. If it asks only for a comparison, FIFO, LIFO and weighted average are the standard three.