METHODS OF PRICING MATERIALS ISSUES
Q.DESCRIBE THE DIFFERENT METHODS OF PRICING MATERIAL ISSUES (OR) WRITE SHORT NOTES ON FIFO, LIFO AND WEIGHTED AVERAGE/SIMPLE AVERAGE. (10 Marks)
When materials are issued for any production work or any job, they have to be valued in the costing department, if materials are purchased for any particular job, the total cost of the materials can be charged to that job. But, generally raw materials are purchased in anticipation and issued whenever they are needed for production, assuming that the rate of raw materials is the same. But this is not the case always.
Prices of everything change on the prevailing condition of the market. The stock lying in the store consists of many purchases at different rates and when issued, they create problems as to the fixation of the price. Therefore the important methods of pricing of materials issued are:
(A)ACTUAL PRICE METHOD:
Under this method, the materials purchased first are issued first at the procurement price and after these are exhausted, the next lot is issued. This method operates on the basis of a simple principle viz., “first come, first served”. Advantages:
1. It is quite simple and easy to understand
2. It can conveniently be adopted in the case of slow moving items of high unit cost. 3. It is appropriate in situations of falling prices to charge the jobs with higher prices purchased earlier. 4. It tends to keep the value of inventory nearer the current market value as well as actual cost. Disadvantages:
1. It makes cost of production fluctuate from period to period when material prices fluctuate. 2. As the materials are issued at old prices, the production cost may not be equal to the market price. 3. Two similar jobs cannot be compared as different rates of materials are issued to execute the jobs.
This method is based on the assumption that the last items purchased are the first to be issued. Though materials are not issued in the chronological order, under this method, the principle that “costs should reflect current market conditions” is recognized. Advantages:
1. It provides a better matching of current costs with current revenues. 2. It is more useful during the period of rising prices, because it does not inflate profits nor overstate the stock. 3. It obviates the necessity for continuously ascertaining the replacement price of materials. 4. It helps the ledger keeper to balance the materials account by reconciling the materials purchased and issued to respective jobs without much difficulty. Disadvantages:
1. This method does not conform to the physical flow of materials. 2. When prices fluctuate very often, the calculations complicate the stores account and increase the possibility of clerical errors. 3. The closing stock does not reflect current market price. This may not be accepted by income tax authorities.
SPECIFIC PRICE METHOD:
When materials are purchased specifically for a particular job or work order, the material requisition may be priced at the actual price paid for the material. However, this method can be employed only in limited situations where it is possible to identify the material issues with the specific jobs or contracts. Advantages:
1. The cost of materials issued for production purposes to specific jobs represent actual and correct cost. 2. Since issues are prices at cost, no profit or loss arises from pricing. 3. Closing inventory is valued at cost.
4. It is best suited for non-standard and specific products. Disadvantages:
1. It is difficult to operate especially when purchases and issues are numerous. 2. Issues cannot be priced until the relevant invoice is received. 3. Maintenance of independent stores records involves clerical work.
BASE STOCK METHOD:
Under this method, a minimum quantity of materials are to be kept in stock, which is known as base stock or safety stock and are valued at the cost price of...
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