2. Last in First out (abbreviated as LIFO) method :

Here the materials received last are assumed
to be issued first from the stores. So, the issue price becomes the price of that lot of
materials which has entered last into the stores. The current cost of materials is charged
against revenue. The unsold stock is valued at an old price which, generally becomes
lower than the current cost price.
It is a method used for ‘pricing of issues’. The physical issue of materials may not follow the
principle that goods received last are to be issued first. Its emphasis is on the use of latest or
current cost for computing cost of production. If it is followed, the replacement of used stock
does not involve additional cost. So, it is also known as Replacement Cost Method.
Advantages:
(1) Cost of production is charged at current price. If the price level shows an increasing trend,
higher amount is charged against revenue for cost of materials used.
(2) Closing Stock is valued at an earlier or old price. So, the valuation will conform to minimum
realisable price and shall not include any profit element.
(3) During inflation, application of this method gives more pragmatic result.
(4) Current cost is matched against revenue. So, the matching cost principle can be used more
effectively.

Disadvantages:

(1) If the price level is decreasing or fluctuating, this method gives inaccurate result.
(2) The closing stock can never reflect current market price.
(3) In India AS 2 does not approve it. The Income Tax Authorities do not allow it. In USA the
Generally Accepted Accounting Principles allow it for use in Tax Returns only.