Full Form

HIFO method of inventory valuation |Advantages, Disadvantages

HIFO method of inventory valuation
HIFO method of inventory valuation

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 FormHighest-in-first out

Also Read – What is LIFO method | Advantages and Disadvantages

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.

Also Read – What is FIFO Method | advantages and disadvantages


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.

Related Links 


Disclaimerwww.efullform.in does not own this book, PDF Materials Images, neither created nor scanned. We just provide the Images and PDF links already available on the internet. If any way it violates the law or has any issues then kindly mail us:

About the author


Leave a Comment