Friday, August 6, 2010

Other Materials Costing Methods - Month End Average Cost | Market Price at Date of Issue | Standard Cost:

Although first in first out (FIFO), average cost, and last in first out (LIFO) are commonly used methods of costing materials units into work in process, various other methods exist. These methods are:
  1. Month End Average Cost
  2. Market Price at Date of Issue
  3. Standards Cost

Month End Average Cost:

To ensure quick costing and early reporting of completed jobs or products, some companies at the close of each month establish an average cost for each kind of materials on hand and use this cost for all issues during the following month. When perpetual inventory costing procedures are not used, a variation of this method is to wait until the end of a costing period to compute the cost of materials consumed. The cost used is obtained by adding both quantities and dollars purchases to beginning inventory figures, thus deriving an average cost.

Market Price at Date of Issue:

Materials precisely standardized and traded on commodity exchanges, such as cotton, wheat copper, or crud oil, or some times costed into production at the quoted price at date of issue. In effect, this procedure substitutes replacement cost for experienced or consumed cost and has the virtue of charging materials into production at a current and significant price. This method of materials costing and that of using the last purchase price or often used for small, low priced items.

Standards Cost:

Standards cost method charges issued materials at a predetermined or estimated price reflecting a normal or an expected future price. Receipts and issues of materials are recorded in quantities only on the materials ledger cards or in the computer data bank, there by simplifying the recordkeeping and reducing clerical or data processing costs.
In recording materials purchases the difference between actual and standard cost is recorded in a materials purchase price variance account. The variance account enables management to observe the extent to which actual materials costs differ from planned objectives or predetermined estimates. Materials are charged into production at the standard price thereby eliminating the erratic costing inherent in the actual cost methods. Standard quantities for normal production runs at standard prices enable management to detect trouble areas and take corrective actions immediately. Materials pricing under standard costs is discussed at Standard costing and variance analysis.

No comments:

Post a Comment