The cost of any materials used in a business is unproblematic from an accounting perspective if every item of similar materials is purchased at the same price. In actual practice, however, market conditions are unstable and prices fluctuate.
Thus, the store ledger cards for a given item of material are likely to show different prices for the same materials purchased at different times. Hence, the question arises: What price should the company charge for the materials issued?
Suppose Item A is purchased in two batches:
Batch 1: Purchased at $5.00 per unit
Batch 2: Purchased at $6.00 per unit
When this material is issued to a production department, the question arises as to whether it should be charged at the rate of $5.00, $6.00, or $5.50 per unit.
Noteworthily, all of these options are viable. However, what is critical is that, before issuing materials to the production department, a costing policy must be devised. In turn, it must be consistently applied.
Methods of Material Costing
Different policies and methods of costing materials are used are as follows: