Page 104 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes Specific Price Method

Specific Price Method is one of the methods of actual price method. In this method adopted
where the materials are purchased for particular job or operation and the issue is charged
with the actual cost price. This method is suitable only in the case of special purpose materials
are purchased for a particular job. This method has been widely used in job order industries
which carry out individual jobs or contract against specific orders. This method is simple and
easy to operate and useful where the job costing is in operation.
Base Stock Method

Under this method pricing is determined on the basis of assumption made here is that a certain
minimum quantity of materials maintained in stock. This minimum quantity is known as Base
Stock or Safety Stock. This quantity cannot be used unless an emergency arises. The minimum
stock is in the nature of fixed assets because it is created out of the first lot of the material
purchased. Therefore it always valued at the actual cost price of the first lot and is carried
forward as fixed assets. This method is usually applied with FIFO or LIFO.

Realization Value Method

Realization value method is a method of evaluating asset’s worth when held in inventory. It
is part of the Generally Accepted Accounting principles and International Financial Reporting
Standards (IFRS) that apply to valuing inventory, so as to not overstate or understate the value of
inventory goods. Realizable value is generally equal to the selling price of the inventory goods
less the selling costs (completion and disposal).
Following is the formula to calculate realization value:
Inventory sales value – estimated cost of completion and disposal = realizable value
Companies need to record the cost of their Ending Inventory at the lower of cost and RV, to
ensure that their inventory and income statement are not overstated.
For example at a company’s year end, if an unfinished good that already cost $25 is expected to
sell for $100 to a customer, but it will take an additional $20 to complete and $10 to advertise to
the customer, its RV will be $100 – $20 – $10 = $70. In this year’s income statement, since the cost
of the good ($25) is less than it’s RV ($70), the cost of the good will get recorded as the cost of
inventory. In next year’s income statement after the good was sold, this company will record a
revenue of $100, Cost of Goods Sold of $25, and Cost of Completion and Disposal of $20 + $10 =
$30. This leads to a profit of $100 – $25 – $30 = $45 on this transaction.
difference between Simple and Weighted Average Method

Simple Moving Average
A simple moving average is calculated by adding all prices within the chosen time period, divided
by that time period. This way, each data value has the same weight in the average result.

Weighted Moving Average
A weighted moving average puts more weight on recent data and less weight on older data.
A weighted moving average is calculated by multiplying each data with a factor from day “1” till
day “n” for the oldest to the most recent data; the result is divided by the total of all multiplying
factors.
E.g. Let’s say you have 3 observations: 4, 7, 12

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