Published on February 15, 2014
Amity Global Business School Presentation on : Average Cost Method Presented by: Prashant Ranka Date: 27/09/2012
Average cost method is that method in which we do not apply FIFO and LIFO but we calculate all purchased materials' average and material's issue will be done on this average price. The average cost is computed by dividing the total cost of goods available for production by the total units available for production. This gives a weighted-average unit cost that is applied to the units in the ending inventory. There are commonly used average cost methods: Simple average, Weightedaverage cost method
In cost accounting, we can calculate the value of material issue on the basis of simple average price method. Under this method, we can calculate the total of unit cost of each purchase and then it is divided by total no. of units.
Suppose, you have bought the material 1st time 500 units @ Rs. 3 2nd time 600 units @ Rs. 4 3rd time 200 units @ Rs. 2 Material issue with simple average method = total of unit cost of each purchase/ total no. of units = 3 +4+2/3 = Rs. 3 Now, all material will be issued from store on the price of Rs. 3. This method is more benefited than FIFO and LIFO, if there is very small fluctuation in the buying prices
Under weighted average method of material issue, we calculate total cost of material and then it is divided by total units of our material. After this, we can get weight average price and we issue the material at this price. In weighted average method, we give the weight on quantity of material issue, so it is better than simple average method, because with giving weight, we can obtain more representative price of material bought in different times.
Simple Steps to Calculate Weighted Average Price of Material Issue 1st step : To calculate total cost of material 500 units bought @Rs. 3 = 1500 600 units bought @ Rs. 4 = 2400 200 units bought @ Rs. 2 = 400 ---------------------------------------total cost of material = Rs. 4300 ______________________________ total no. of units = 1300 units Weighted Average Price = Total cost / total units = total of WX/ total of W = 4300/1300 = Rs. 3.30
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