Material Issue Pricing — Some methods

Replacement Price Method:

This method is also known as market price method under which the material issues are priced at the prevailing market price on the date of the issue. This method is based on the principle that the materials issued for any job on a particular day should be charged at the rate at which they could be replaced immediately from the fresh purchases on the same day. In short, material issues are priced at the prevailing market price on the date of its consumption. This method is applicable to the raw materials of standardized grades which are traded at the commodity exchanges such as cotton, cereals, certain metals etc., because the prices of such items are quoted in the newspapers and it is relatively easier to ascertain the current market price. The main advantage of this method is that it considers the current market price which is more significant for the purpose of the pricing policies. It enables the comparison of the operating efficiencies with those of the competitive units. The comparison between the purchase price and the issue price (i.e. the market price) reflects on the efficiency or otherwise of the purchase department. The main drawback of this method is that it distorts the data fro the accounting purposes which necessitates the adjustments in the Stores Ledger. There is bound to be a discrepancy between the purchase price and the issue price. The difference between the market price and the purchase price is adjusted to they Price fluctuation reserve account which indicates the efficiency or inefficiency of the purchase department.

Standard Price Method: Under this method the material issues are charged at a predetermined, budged or estimated price which reflects a normal or an effected future price. Generally standard price is fixed after the careful examination of the current market price, trend of the price, market conditions etc., so that a fairly correct average standard price may be predetermined. The standard price is made applicable for a definite period say a month, a quarter or a year. The material receipts are recorded at the actual price while the material issues are cost at the predetermined standard price. So there is bound to be the discrepancies between the standard and the actual price. The difference between the actual price paid and the standard price charged is recorded to a separate Price Variance Account. The standard price is revised periodically if the discrepancies go beyond a particular limit. The main advantage of this method is that the pricing of issues becomes a simplified function. Like FIFO, LIFO an average cost method, the issue price need not be ascertained after receipt or issue of materials. However, it is not advised if the materials involve frequent and substantial price fluctuation.

Actual Price Method: Under this method the material issues are priced at the actual acquisition cost of the respective materials. This method is applicable where the purchases are made for the specific jobs and are kept physically separate in the store room. Each material receipts is recorded in separate stores card and the materials issues are cost at the actual acquisition cost. This method is relatively awkward however, it is advised where few costly items are used in the processing and where non-standardized materials are purchased to meet the customer’s specification. It is more suitable to the jobbing industries.

Inflated Price Method: This method of pricing is based on the principle of uniform spreading of normal wastage on the residual units. There are certain types of normal wastage which are incidental to materials usage e.g. loss of braking the bulk, evaporation etc. The cost of such normal wastage is absorbed by the good units through charging the material issues at inflated price: e.g. 100 units at Rs 15 were purchased. This material is subject to 10% normal wastage soothe total cost of Rs 1,500 (100 unitsxRs 15) will spread over 90 (100 units–10 units normal wastage) good units, and the issue of the materials will be charged at a inflated price of Rs 16.67 (Rs 1,500 x 90 units) instead of Rs 15.

In conclusion it should be noted that the material pricing should be on the basis of the acquisition cost of the materials. The acquisition cost should consider the net invoice price of the supplier and the transportation charges which are the visible costs. They should also consider certain invisible costs like the cost of ordering, receiving unpacking, inspection, insurance, storing etc.