Cost Price Method

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on September 6, 2021

Explanation of Cost Price Method

Under cost price method, materials issued to production, are charged out on the basis of actual cost i.e., the cost at which these have been purchased. As we already know, the actual cost of materials consists of purchase price or invoice price (less trade discount and quantity discount), import duty, sales tax, commission on purchase, freight, carriage, cartage, transit insurance and octroi duty.

Basis of Cost Price Method

This method is considered to be the simplest and most scientific as it helps in recovering the actual cost of materials paid, from production. As such, it adheres to the costing principles. Under the actual cost method, the materials issued can be priced out on any of the following basis:

First-In-First-Out Method

Under this method, materials purchased or received first are deemed to be issued first. As such, the price paid for the earliest lot of materials in hand is taken as the basis for charging out the materials issued. Under this method, the various items on the debit side of the Stores Ledger (Receipts Column) are exhausted in chronological order.
The stock in hand, under this method, is valued at cost of the current or latest purchases. This requires the maintenance of the record of quantity and value of every receipt of material.

Example (FIFO)

The operation of this method can be understood by the following example:
Cost Price method - FIFO Method

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

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

True contributes to his own finance dictionary, 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, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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