Production Management

The Principal Methods of Pricing of Materials taken out Store for Production

There are different methods of pricing of materials taken out of stores for production under discussion. When raw material is issued from the stores to the production departments, the questions arises, at which price jobs or work orders should he charged for the price of raw-material. In other words, at what price the material should be priced. In preparing cost statements, several methods of pricing the material issued may be used, the choice depending largely on the materials and particular conditions in the business. The principal methods are as follows:

A. Cost Price Method-

1. First In First Out (FIFO)

2. Last In First Out (LIFO) -now deprecated

(3) Highest-in-First out

(4) Next-in First out

(5) Average Cost

(6) Inflated Price

(7) Specific Price

(8) Base Stock

B. Market Price Methods

(1) Replacement Cost

(2) Net Realizable Value.

C. Standard Price Methods

(1) Current Standard Price

(2) Basic Standard Price

A very careful choice has to be made of the method of valuing the material issues because it influences the cost of the jobs and the value of the closing balances of materials in the stores.

A good method of valuing material issues should satisfy the following conditions :

1. The issue price should recover fully the cost price of the materials.

2. The issue price must be near the market price.

3. The issue price should not lead to any significant variation in cost of similar jobs from period to period so far as materials are connected, otherwise comparison of similar jobs will become difficult.

4. The issue price should necessitate heavy adjustment in values of stock of materials in the stores ledger at the end of the year thus making the stores ledger complicated.

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