FIFO, LIFO and AVCO

Re:FIFO, LIFO and AVCO

At times of rising costs, what is the effect on profit if the company uses
a) The FIFO method
b) The LIFO method
c) The AVCO method

The 'rising costs' refers to the purchase price of the materials or the sale price?

Under FIFO, your issues are made at the earliest prices and the closing stock valued at the most recent prices.
This can cause products to be undercosted as the replacement cost of any stock issued is greater than the issue price.
This method will produce the highest reported profit in times of rising prices.


Under LIFO, your issues are made at the most recent prices and the closing stock valued at the earliest prices.
This can cause the closing stock to be undercosted as the cost is out of date.
This method will produce the lowest reported profit in times of rising prices.

Under AVCO, your issues are at the weighted average price and as such will tend to undercost issues (but not to the same extent as FIFO)

The profit reported falls between the other 2 methods.