Page 57 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes
* ⎛ 800 1,140 ⎞ + ** ⎛ 1120 1,300 ⎞ +
⎜ ⎟ = ` 4.48 ⎜ ⎟ = ` 4.84
⎝ 200 300 ⎠ + ⎝ 250 250 ⎠ +
How it is considered as a superior method over the early one?
The cost of the materials amounts to ` 20,00,000. The total issue price of the materials is as
follows:
= 60,000 Kg × ` 33.3333 per K.g = ` 19,99,998 approximately equals to the cost of the materials
i.e. ` 20,00,000/-
Advantages

This method is a most rational method in finding out the issue price of the materials.

It never takes into consideration the price fluctuations either during the trend of rising or
falling.
Issue prices mainly depend upon the number of purchases.

Under this method, the issue price is able to recover the cost of the materials.

The issue price reflects or resembles the market price.
Disadvantages

Due to different volumes of materials, clerical errors may arise.
It lost its expression in terms of actual price of materials due to average price.
Base Stock Method

Under this method, the minimum or safety stock of materials is to be stored from the initial lot
of purchase by the enterprise. The ultimate purpose of maintaining the stock in order to meet the

emergency whenever arises. Once the base stock is created out of the first lot of purchase, should

be considered as a fixed volume forwarded from one point of time to another.
It is the only method having the prime objective of issuing the materials to the tune of current
prices. This method normally carries out its operations either with FIFO or LIFO. While applying
the FIFO or LIFO method in the applications of the base stock method it bears the advantages and
disadvantages of the fundamental procedures of earlier two methods.
The basic objective of the method could be met out only with the conjunction of LIFO method.

Illustration 3:
The stock of material Z as on Jan 2004 is 500 units at ` 2 per unit. The following purchases and
issues of this item were made subsequently:

Date Receipts Qty. Units Rate per unit ` Issue Qty Units
Jan 6 200
Jan 10 400 2.20
Jan 15 300 2.40.
Jan 20 500
Jan 21 200
Jan 24 500 2.60
Jan 25 300
Jan 28 200

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