In an organisation where standard costing is implemented, why is it wrong to use Standard Cost instead of FIFO ?

Question

Accepted Answer

Using Standard Cost instead of FIFO in an organization with standard costing is wrong because it does not accurately reflect the actual cost of inventory.

Standard costing assumes that all units of inventory are valued at the same cost, regardless of when they were purchased or produced.
FIFO (First-In, First-Out) method, on the other hand, values inventory based on the assumption that the first units purchased or produced are the first ones sold or used.
Using Standard Cost instead of FIFO can lead to inaccurate cost calculations and distorted financial statements.
For example, if the cost of raw materials increases over time, using Standard Cost would undervalue the inventory and overstate the profitability.
FIFO, on the other hand, would reflect the actual cost of inventory and provide a more accurate picture of the financial health of the organization.

Accepted Answer

Standard Cost can be used if we don't know actual cost or if standard Cost is more appropriate. Taking reference from Costing Standards (CAS) and Accounting Standards (AS) FIFO is a way we determine flow/ movement of the inventory. While Standard Cost is a way we determine cost of the inventory. Alternative to FIFO are either WAM if inventory items homogenous or specific identification method if mean for specific supply. Alternative to Standard Cost is Actual Cost of the inventory or Retail Price Method.

In an organisation where standard costing is implemented, why is it wrong to use Standard Cost instead of FIFO ?

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