Material Pricing: Objectives Of Material Cost
Cost accounting
Methods of pricing material issue Objectives of materials pricing The main objectives of material pricing are:-
1. To charge cost of materials used on a realistic and consistent basis.
2. To measure the cost of production and the cost of sales.
3. To provide a satisfactory basis for the valuation of stocks for recognizing the same in the balance sheet.
4. The system followed should be achieved by adopting a system which is administratively feasible yet effective. Problems of material pricing The problems faced during the pricing of materials are
1. Rapidly changing prices of brought in materials.
2. Materials are replinished regularly and each fresh lot when placed in the bin gets mixed with the
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It follows that the unit cost are apportioned to the cost of production according to the order of receipts in the stores. It is most suitable in times of falling prices because the issue of prices of materials to the jobs will be high while the cost of replacement of materials will be low. But in case of risisng prices it is not suitable because the issue price of materials will be low while the cost of replacement will be …show more content…
Again when prices rise the issue price does not reflect the market price as materials are issued from the earliest consignments. Therefore the charge of production is low because the cost of replacing the material will be higher than the price of issue.
(iii) Last-in, First-out (LIFO) method : - The system assumes that the largest receipt of the materials in the stock is issued first. This method is sometimes known as the replacement cost method because the materials are issued at current cost to work orders except when purchases were made long ago. It is suitable in times of rising prices because materials will be issued in the latest consignment at a price which is closely related to the current price level. This will help the management in fixing the competitive selling price of the products.
Advantages –
It is simple to operate and useful when transactions are not too many. Like FIFO this method also recovers cost from production because actual cost of materials is charged to production. In times of rising prices this method is suitable because materials are issued at current market prices which are
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