Page 105 - DCOM202_COST_ACCOUNTING_I

Unit 5: Methods of Valuing Material Issues

The arithmetic mean is (4+7+12) / 3 = 23/3 = 7.67 Notes
Now let’s assume that you want to weight the first observation by a factor of 10, the second
observation by a factor of 5 and the third observation by a factor of 2:
The weighted mean is (4x10+7x5+12x3) / (10+5+2) = 111/17 = 6.53

5.7 Replacement or Market Price Method

Under this method, material is issued at the price at which, on the date of the issue of materials,
the identical material can be purchased from the market. In other words, the materials are issued
at the market prices of the same type of materials on the date of the issue. This method is used
when it is designed to reflect current prices in cost. It is must suitable for business that buys large
quantities of materials well in advance of requirements.

Advantages of Replacement or Market Price Method

Following are the main advantages of this method:
(a) The material cost of the product reflects the current market price, and

(b) It is simple and easy to operate as no calculations are required to be made of the issue
prices as is done in average, FIFO, LIFO methods, etc.

disadvantages of Replacement or Market Price Method

Market price method suffers from the following disadvantages:
(a) It deviates from the costing concept, in the sense that issues are not prices at actual cost,
(b) In this method, inventory valuation is not at current prices, and

(c) It involves considerable work of finding out the replacement price at the time of each issue.
Some times replacement price is not easily available or not available at all.

Example: From the following particulars, prepare a stores ledger account by Market
price Method of issue of materials purchased.
purchases:
May 2 1,000 units @ ` 1 per unit

May 10 1,500 units @ ` 1 per unit
Issues:
June 8 500 units @ ` 1.10 per unit
July 20 1,000 units @ ` 1.25 per unit.

Solution:
Stores Ledger Account with the Help of Market Price Method

date Receipts Issues Balance
Qty. Rate Amount Qty. Rate Amount Qty. Rate Amount
Units (`) (`) Units (`) (`) Units (`) (`)
May 2 1,000 1.00 1,000 – – – 1,000 1.00 1,000
May 10 1,500 1.00 1,500 – – – 2,500 1.00 2,500
Contd…

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