Methods of Pricing Materials issued from Stores to Production
There are various methods in the use of pricing issues of materials from the store. The selection of a suitable method is significant from the viewpoint of cost absorbed and consequently on profit. Therefore, the method should be selected in the light of probable effects on profit over a period of years.
The material is purchased specially for a job. The material issued is charged to the job at its landed cost. Landed cost includes the invoice price, freight, cartage and insurance charges on materials. An issue of such items cannot be linked with a particular ‘lot’ and therefore, exact landed cost of the particular unit issued cannot be identified. If the purchase price for each lot is different from that of the others, the question arises as to which purchase should be taken into consideration for pricing material issues.
Some important and most used methods of pricing are as follows.
- First in First Out (FIFO) Method – Under this method materials are issued out of stock in the order in which they were first received into stock. This method of inventory valuation is acceptable under standard accounting practice.
- Last in First Out (LIFO) Method – Under this method most recent purchase will be the first to be issued. It is a method of pricing the issue of material using the purchase price of the latest unit in the stock.
- Simple Average Method (SAM) – Under this method, all the materials received are merged into existing stock of materials, their identity is lost.
- Highest-in First-Out (HIFO) Method – Under this method, the materials with the highest prices are issued first, irrespective of the date upon which they were purchased.