Material Costing Methods

Written by True Tamplin, BSc, CEPF®

Updated on December 21, 2022

Overview

Material costing methods are used to calculate the cost of material inputs in a manufacturing process. There are several common material costing methods, including first in, first out (FIFO), last in, first out (LIFO), and weighted average.

Each material costing method has its own set of advantages and disadvantages, depending on factors such as material usage patterns, material costs, and production volume. 

Last in, First Out (LIFO) is currently not an acceptable accounting method under GAAP.

First In, First Out (FIFO)

First In, First Out (FIFO) is one of the most commonly used material costing methods. Under this method, material that has been purchased or received first is considered the first material to be consumed in the production process, and therefore is considered the “first material out”.

This method is often used because it provides a more accurate representation of material usage and material costs, and is especially useful for companies with highly variable material usage patterns.

However, FIFO may not be the most appropriate material costing method in all situations. For example, if material prices fluctuate significantly over time, this method may result in higher material costs, as material that was purchased at a lower price is considered material consumed first.

Here is an Example FIFO Method Problem and Solution.

Last in, First Out (LIFO)

Last in, First Out (LIFO) material costing is commonly used in situations where material usage spikes at certain times of the year or during peak production periods. Under this method, material that was acquired most recently will be considered the first material used for a given manufacturing process, regardless of when the material was actually purchased. This allows manufacturers to more accurately match material costs with sales and production volumes.

However, LIFO material costing can result in higher material costs during periods of high material usage. Additionally, this material costing method may not be appropriate for companies that experience a significant amount of material waste or spoilage.

Here is an Example LIFO Method Problem and Solution.

Weighted Average

Another common material costing method is the weighted average material costing method, which is calculated by dividing the total material cost for a given period by the total material usage during that period. This method is often used when material costs and material usage vary significantly over time, as it provides a more accurate representation of material costs relative to material usage.

However, using weighted average material costing may require additional calculations or complex accounting systems in order to accurately track material usage and material cost over time. Additionally, material usage that fluctuates significantly from year to year may make it difficult to determine an accurate material cost for a given period.

Conclusion

Overall, there are many different material costing methods available, and the choice of method will depend on factors such as material usage patterns, material costs, and production volume. Choosing the right material costing method can help manufacturers to more accurately track material costs and improve the efficiency of material usage in their production processes.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.