Production Management

Inflated Price, Specific Price and Base Stock Price Method of Stock Valuation

Inflated Price Method of Stock Valuation:

There are some materials which are subject to natural wastage. Examples are : (1) Coal lost due to loading and unloading and (2) timber lost due to seasoning. In such cases, the material are issued at an inflated price (a price higher than the actual cost) so as to recover the cost of natural wastage of materials from the production. In this way, the total cost of the materials is recovered from the production.

For example, if 100 tonnes of coal are purchased at $75 per tonne and if it is expected that 5 tonnes of coal will be lost due to loading and unloading the inflated issue price in this case will be $78.95 i.e. (100 x 75)/95 per tonne. With the actual issue of 95 tonnes of coal, the actual cost of $7500 (100 tonnes purchased @ $75 per tonne) will be recovered from production (95 tonnes @ $78.95).

Specific Price Method of Stock Valuation:

When materials are purchased fora specific job or work order, they should be issued to that specific job or work order at their actual cost. This method is used where job costing is in operation and the actual materials issued can be identified.

Base Stock Price Method of Stock Valuation:

Each concern always maintains a minimum quantity of material in stock. The minimum quantity is known as safety or base stock and this should be used only when an emergency arises. The base stock is created out of the first lot of the material purchased and therefore, it is always valued at the cost price of the first lot and is carried forward as a fixed asset.

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