Cost
Accounting - Material Costing
Methods of
pricing the issues of materials
(Including
preparation of Stores Ledger)
Part A
BASIC THEORIES
Methods of pricing the issues of
materials
Materials issued against
stores requisition are to be priced by the cost department before such issues
are entered in the stores ledger and charged to a job or service. There are
different methods of pricing the issues which may be enumerated as follows:
1.
Actual cost method (also known as specific cost
method),
2.
First-In-First-Out (FIFO) method,
3.
Last-In-First-Out (LIFO) method,
4.
Simple average method,
5.
Weighted average method,
6.
Periodic simple average method,
7.
Periodic weighted average method,
8.
Moving simple average method,
9.
Moving weighted average method,
10. Standard cost method.
1. Actual cost method
Under this method, purchases made for
particular jobs are kept physically separately in the store rooms and store
cards are made out for the individual purchases. When materials are issued for
jobs, requisitions are priced at the exact cost as recorded on the appropriate
stores cards. This system is time consuming, but it is used effectively, when
non-standardised items of materials have to be purchased to meet a customer’s
specification. Some concerns operating on a job order basis use this method to
price issues of materials that are not regularly kept in stock. Some other
method is used to cost materials that are regularly used in production. This
method does not have wide usage in big concerns due to basically the following
two reasons:
(a)
This method is time consuming, and
(b) This method is tedious in terms of record
keeping.
2. First-In-First-Out (FIFO) method
Under this method, for the
purpose of pricing the issues it is assumed that the materials received first
are consumed first. This is only an assumption for the purpose of taking rates
for valuing issues. In actual practice, the pattern of cost flow may not
necessarily coincide with the physical flow of the materials. FIFO method does
not mean that the oldest materials are necessarily used first; in fact, the
material received last may be issued first. It simply means that the oldest
costs are used for accounting purposes first regardless of actual physical flow
of materials. This method is ideally used where material is slow moving and has
comparatively high unit cost.
3. Last-In-First-Out (LIFO) method
Under this method, for the
purpose of pricing the issues it is assumed that the materials received last
are consumed first. This is only an assumption for the purpose of taking rates
for valuing issues. In actual practice, the pattern of cost flow may not
necessarily coincide with the physical flow of the materials. LIFO method does
not mean that the latest materials are necessarily used first; in fact, the
material received first may be issued first. It simply means that the latest
costs are used for accounting purposes first regardless of actual physical flow
of materials. This method works well in process cost systems where individual
material requisitions are seldom used and materials move into process in bulk
lots.
4. Simple average method
Under this method, the
different purchase prices of the materials in the stock, at the time of the
issue for which the pricing is to be done, are added and then divided by the
number of such purchases to obtain the simple average issue price. In short, a
simple average of prices of lots available for issue is taken as the issue price. Any new purchase or
exhaustion of any existing stock requires the issue price to be revised. The
quantity of each purchase is ignored for the purpose of ascertaining the simple
average issue price. It should be
remembered that for deciding the possible lots out of which the issues could
have been made, the method of FIFO is followed. The simple
average method is particularly useful in the following circumstances:
(a)
When materials are received in uniform lot
quantities.
(b)
When it is difficult to identify each issue of
materials with the lots.
(c)
When purchase prices do not fluctuate
considerably.
5. Weighted average method
Under this method, the total
value (at cost) of materials in stock at the time of issue is divided by the
total quantity of materials in stock to obtain the weighted average issue
price. Once a rate is worked out, it goes on being applied until a fresh
purchase comes. This method is applicable when both purchase prices and order
quantities fluctuate considerably.
6. Periodic simple average method
Under this method, the
rates of purchases during a given period are added and then divided by the
number of such purchases during that period to obtain the periodic simple
average issue price. Since the
opening stock represents last period’s purchase, its value is not considered in
the calculation of periodic simple average issue price. When
this method is followed, the entire work of charging the issues has to be kept
suspended till the end of the period when it is possible to calculate the
periodic simple average issue price. This method can be successfully used in
process industries.
7. Periodic weighted average method
Under this method, the
total cost of a material purchased during a given period is divided by the
total quantity of the material purchased during that period to obtain the
periodic weighted average issue price. Since the
opening stock represents last period’s purchase, its value is not considered in
the calculation of periodic weighted average issue price. When
this method is followed, the entire work of charging the issues has to be kept
suspended till the end of the period when it is possible to calculate the
periodic weighted average issue price. This method can be successfully used in
process industries.
8. Moving simple average method
Under this method, the
issue price is computed by dividing the total of the periodic simple average
prices of a given number of periods by the number of periods. The moving simple
average issue price so arrived at is used for pricing the issues made during
the last of the above number of periods. This method is very useful when there
are extreme fluctuations in material prices and the organisation desires to
spread the total cost evenly over all goods.
9. Moving weighted average method
Under this method, the
issue price is calculated by taking the average of periodic weighted average
prices, i.e. total of the periodic weighted average prices of a given number of
periods is divided by the number of periods to obtain the moving weighted
average issue price. The moving simple average issue price so arrived at is
used for pricing the issues made during the last of the above number of
periods. This method is very useful when there are extreme fluctuations in
material prices and the organisation desires to spread the total cost evenly
over all goods.
10. Standard cost method
Under this method,
requisitions of materials are priced at standard cost. Standard cost is
determined after careful consideration of different factors that are likely to
affect cost. When standard cost is used as a basis for pricing the material
issues, a standard price is set for each material and actual price is compared
with the standard price. This method is very useful for management in
determining the efficiency of efforts relating to material purchase, material
issue and material usage, etc.
Important note:
As per Accounting Standard
(AS) 2 w.r.t valuation of inventories, the cost of inventories should be assigned
by using the first-in, first-out (FIFO), or weighted average cost formula. In other words,
Stores Ledger Account should be prepared under the FIFO Method or Weighted
Average Method of valuation of inventories and pricing the issues of materials
to production. Accordingly, in this article I have illustrated these two
methods of pricing the issues of materials to production along with two other
popular methods which are Last-In, First-Out (LIFO) Method and Simple Average
Method.
Stores ledger
The stores ledger is
maintained by the costing department. It is usually kept in loose-leaf or card
form so that they can be removed and inserted easily. Each account in the
stores ledger represents an item of material. It is the most authentic record
of stock value at any given point in time under different methods of pricing
the issues of materials. The format of the
stores ledger account which is same for all the different
methods of pricing the issues of materials is as follows:
Treatment of shortage or surplus
If there are discrepancies
arising between physical and book balances, necessary adjustments have to be made in
the stores ledger. The shortage will be shown as issue and will be valued on the same
basis as that of pricing of actual material issued. The surplus will be treated as
receipt at the latest purchase price just before the surplus is reported.
Valuation of returns to stores
When material is returned
back from production department to the stores, the return is to be shown in the
receipt column and the material should be taken back at the same price at which
it was issued.
Valuation of returns to vendors
Materials which are not
accepted for quality reasons or due to non-conformity to the specifications
will be returned back to the vendor. If the defect is spotted during initial
quality check, the materials are not taken in the stock ledger at all and
returned as it is. If the materials are taken into stock, but not yet issued,
the return is valued at the same price at which the receipt is recorded. If an
issued material has to be returned back, firstly it is shown as a return from
the production department to the stores and subsequently shown as a return to
the vendor.
Part B
Cost
Accounting - Material Costing
Methods of
pricing the issues of materials
(Including
preparation of Stores Ledger)
SELECTED PROBLEMS
Illustration:
1
Prepare a Stores Ledger Account from the following
information adopting FIFO method of pricing of issues of materials.
2020, March
1. Opening Balance 500 tonnes @ Rs 200
3. Issue 70 tonnes
4. Issue 100 tonnes
5. Issue 80 tonnes
13. Received from suppliers 200 tonnes @ Rs 190
14. Returned from Department: A 15 tonnes.
16. Issued 180 tonnes
20. Received from supplier 240 tonnes @ Rs 195
24. Issue 300 tonnes
25. Received from supplier 320 tonnes @ Rs 200
26. Issue 115 tonnes
27. Returned from Department: B 35 tonnes
28. Received
from supplier 100 tonnes @ Rs 200
Illustration: 2
From this information provided as under, you are
required to prepare a statement showing how the issues would be priced if LIFO
method is followed.
2020, February
1. Opening Balance 100 units at Rs 10 each.
2. Received 200 units at Rs 10.50 each.
3. Received 300 units at Rs 10.60 each.
4. Issued 400 units to Job A vide M.R.No.015.
6. Issued 120 to Job B vide M.R.No.020.
7. Received 400 units at Rs 11 each.
8. Issued 200 units to Job B vide M.R.No.031
12. Received 300 units at Rs 11.40 each.
13. Received 200 units at Rs 11.50 each.
17. Issued 400
units to Job D vide M. R. No. 040.
Illustration:
3
Prepare a statement showing the pricing of issues, on
the basis of Simple Average Method from the following information pertaining to
Material-D.
2020, March
1.
Purchased
100 units @ Rs 10 each
2.
Purchased
200 units @ Rs 10.2 each
5. Issued 250
units to Job X vide M.R.No.12
7. Purchased
200 units @ Rs 10.50 each
10. Purchased
300 units @ Rs 10.80 each
13. Issued 200
units to Job Y vide M.R.No.15
18. Issued 200
units to Job Z vide M.R.No.17
20. Purchased
100 units @ Rs 11 each
25. Issued 150 units to Job K vide M.R.No.25
Illustration:
4
Prepare a statement showing the pricing of issues, on
the basis of Weighted Average Method from the following information pertaining
to Material-D.
2020, March
1.
Purchased
100 units @ Rs 10 each
2.
Purchased
200 units @ Rs 10.2 each
5. Issued 250
units to Job X vide M.R.No.12
7. Purchased
200 units @ Rs 10.50 each
10. Purchased
300 units @ Rs 10.80 each
13. Issued 200
units to Job Y vide M.R.No.15
18. Issued 200
units to Job Z vide M.R.No.17
20. Purchased
100 units @ Rs 11 each
25. Issued 150 units to Job K vide M.R.No.25
Illustration:
5
The following are the details of receipts and issues
of materials in a factory during January, 2020:
|
Date |
Particulars |
Qntty / Rate |
|
2 |
Opening balance |
1,000 kg @ Rs 30 |
|
3 |
Issued |
140 kg |
|
4 |
Issued |
200 kg |
|
8 |
Issued |
160 kg |
|
13 |
Received from vendor |
400 kg @ Rs 35 |
|
15 |
Return from work order |
30 kg @ Rs 28 |
|
16 |
Issued |
360 kg |
|
18 |
Received from vendor |
600 kg @ Rs 32 |
|
20 |
Issued |
550 kg |
|
22 |
Received from vendor |
400 kg @ Rs 34 |
|
24 |
Issued |
250 kg |
|
29 |
Return from work order |
40 kg @ Rs 32 |
|
30 |
Received from vendor |
200 kg @ Rs 36 |
Prepare separate statements, showing how the value of
the issues as stated above should be arrived at under the
(a)
FIFO method,
(b)
LIFO method,
(c)
Simple Average method, and
(d) Weighted Average method.
Click here for Solution: 5(a) in PDF
Click here for Solution: 5(b) in PDF
Click here for Solution: 5(c) in PDF
Click here for Solution: 5(d) in PDF
I have read this article and is very helpful for CMA Intermediate Group 1
ReplyDeleteVery informative and important article for all CMA students.
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