In a manufacturing concern, there are different approaches to valuing or pricing materials issued for production. The exact method used usually depends on the nature of the materials and the nature of the business itself.

Whichever method of pricing materials issued is followed, the actual issue of materials will always be recorded from the earliest consignment. The main methods used to price materials issued are:

  1. Cost Price Method
  2. Market Price Method
  3. Average Price Method
  4. Fixed Price Method
  5. Inflated Price Method
  6. Base Stock Method

Choosing a Pricing Method For Materials Issued

Selecting a method for pricing materials issued cannot be done by following a formula. The choice depends on considering multiple factors, including:

  • The nature of production (intermittent or continuous)
  • Volume/frequency of receipts of materials
  • Variations and fluctuations in price and their nature
  • Frequency of issues of material
  • Stock turnover rate
  • Effect of pricing method on tax payable
  • Clerical labor involved in the method
  • Traceability of the issue to the particular lot or consignment
  • Nature of the cost accounting system followed

Frequently Asked Questions

Which is the best pricing method for materials when the price of material varies?

The calculation under different costing systems should be done according to the requirements and needs of that particular business. If you need to buy materials at a much lower cost, then go for lifo (last in first out), if you enter goods at a high rate, then fifo (First In First Out) will be more suitable.

Can the price of materials and cost of goods sold be different?

Yes, they can be different. The two calculations may differ because of the difference in calculation methodologies used by both. Cost price is basically an actual expense on buying materials whereas sales price is an amount which is charged for selling a product.

What kinds of fluctuations will the cost and sales price methods show?

1) Price changes in material due to market conditions. 2) Quantity changes at different prices. 3) Volume changes from period to period result in higher or lower gross profit figures. 4) The cost of goods sold will be different for the two methods because they follow different rules in determining which costs to charge to cost of goods sold.

What is the difference between unit-based and transaction-based costing?

Transaction based costing: it is a method in which it involves recording all transactions like purchase, sales and production. Unit based costing: it is a method in which it involves identifying how much one particular unit or transaction has contributed towards profit and loss of the business.

What are some advantages of using FIFO method?

It helps in reducing the possibility of stock losses due to damage, theft, etc. It helps in anticipating future Cash Flows. It also helps in forecasting cost of manufactured products based on the latest prices of raw materials.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, 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.

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