Simple Average Price Method12th May 2021 1 By indiafreenotes
Under this method, simple average rate at cost is obtained by adding the rate of purchases represented by stock at the time of issue & then dividing the same by the number of such rates. The rate needs to be revised at the time of any new purchase or exhaustion of any existing stock. For the purpose of ascertaining the average rate, the quantity by which each purchase is made has to be ignored.
To dampen the severity of the effect of rises & falls in the purchase price, use of any kind of average rate is made. Thus, in case of fluctuating rates of purchase, average cost is used. However, obviously, cost does not get properly represented by the average cost.
Features of Simple Average Method:
(i) This method of pricing materials issues is suitable when goods are purchased/acquired at different prices and they are not clearly identifiable.
(ii) The inventories that are issued are valued at a simple average price which is determined on the basis of the price of an existing lot of goods at the time of issues.
(iii) This method of pricing of inventory issue is not recognized by Ind AS2.
(a) It is simple to work out & apply.
(b) Issue price cannot be affected considerably by the fluctuations in prices of purchase.
(c) Average cost method is suitable for the condition when different lots of purchases get mixed up so that the identification is not possible.
(d) Where the quantity of each purchase is stable but the prices fluctuate, average cost method suits the condition.
(a) Profit or loss in material arises as total cost incurred usually does not become equal to the total charges.
(b) Frequent calculations of rates will be necessary in case of frequent purchases, thereby involving much clerical work. Average rate may have to be revised due to exhaustion of an existing stock even if no new purchase comes.
(c) Too much profit or loss on materials may be resulted from the method, when lots of purchases vary much in quantities.
(d) Due to fact that the identity of the materials disappeared in the store, the verification of closing stock figures becomes difficult.
(e) Absurd figures may be shown by the closing stock. The closing stock account may even show credit balance, in times of inflationary spiraling.