Material Issues, Pricing of Material Issues

Material issues refer to the process of releasing raw materials, components, or spare parts from inventory to production or other departments as required. This step is crucial in cost accounting and inventory management, ensuring that materials are available for production while maintaining proper stock control.

Effective material issuance helps businesses minimize wastage, prevent theft, and optimize stock utilization. It also ensures smooth production flow by making the right quantity of materials available at the right time. The process typically involves material requisition, authorization, record-keeping, and periodic verification to avoid discrepancies.

Methods of Material Issues:

To manage material issues effectively, companies use various issuing methods based on cost allocation and inventory valuation. Some common methods:

1. First-In-First-Out (FIFO): Oldest inventory is issued first.

2. Last-In-First-Out (LIFO): Most recently received materials are issued first.

3. Weighted Average Cost (WAC): Uses the average cost of all materials available.

4. Specific Identification Method: Assigns cost based on specific purchase batches.

Selecting an appropriate method ensures accurate cost tracking, proper inventory turnover, and efficient resource utilization.

Pricing of Material Issues:

Once materials are issued, their pricing must be determined to calculate the cost of production accurately. Various pricing methods are used in cost accounting to assign a value to issued materials.

1. First-In-First-Out (FIFO) Method

This method assumes that the earliest purchased materials are issued first. The cost of issued materials is based on the oldest stock available. FIFO is beneficial in industries where materials are perishable or prone to obsolescence, such as food, pharmaceuticals, and electronics.

Advantages:

• Ensures materials are used before they expire.

• Reflects actual material flow in most businesses.

• Suitable for inflationary periods as older, lower-cost materials are used first.

Disadvantages:

• Can lead to higher costs in times of rising prices.

• Complex tracking of multiple purchase batches.

2. Last-In-First-Out (LIFO) Method

Under LIFO, the most recently purchased materials are issued first. This means that the cost of issued materials is based on the latest purchase price.

Advantages:

• Reduces taxable income during inflation.

• Matches recent material costs with current production costs.

Disadvantages:

• Not permitted under some accounting standards (e.g., IFRS).

• Can lead to outdated stock remaining unused.

3. Weighted Average Cost (WAC) Method

The Weighted Average Cost method calculates an average price for all materials available and assigns that price to issued materials. The formula used is:

Weighted Average Cost = Total Cost of Available Inventory / Total Units Available​

Advantages:

• Reduces price fluctuations in cost accounting.

• Simplifies inventory valuation.

Disadvantages:

• May not reflect actual material flow.

• Not suitable for perishable materials.

4. Specific Identification Method

This method assigns the exact cost of each material batch to its issued stock. It is commonly used in industries dealing with expensive or unique items, such as jewelry, automobiles, and machinery components.

Advantages:

• Provides highly accurate cost valuation.

• Ideal for industries with low inventory turnover and high-value items.

Disadvantages:

• Requires detailed tracking.

• Not suitable for high-volume transactions.