by Material pricing methods are essential for valuing inventory and costing material issues. Two commonly used methods are the Weighted Average Price (WAP) Method and the Standard Price Method.
Weighted Average Price (WAP) Method
Weighted Average Price (WAP) method calculates an average cost for all units of inventory available, ensuring that each issued unit carries the same cost. This method smooths out price fluctuations and provides a balanced cost valuation.
Formula
Weighted Average Price per Unit = Total Cost of Available Inventory / Total Units Available
After every purchase, a new weighted average price is recalculated and applied to all material issues.
Example
| Date | Purchases | Unit Price (₹) | Total Cost (₹) | Units Issued | Balance (Units) | Balance Value (₹) | Weighted Avg. Price (₹) |
|---|---|---|---|---|---|---|---|
| Jan 1 | Opening Stock: 100 | 10 | 1,000 | – | 100 | 1,000 | 10.00 |
| Jan 5 | Purchased: 50 | 12 | 600 | – | 150 | 1,600 | 10.67 |
| Jan 10 | Issued: 80 | – | – | 80 | 70 | 746.67 | 10.67 |
| Jan 15 | Purchased: 100 | 11 | 1,100 | – | 170 | 1,846.67 | 10.86 |
| Jan 20 | Issued: 90 | – | – | 90 | 80 | 868.80 | 10.86 |
Advantages
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Smooths out price fluctuations over time.
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Simple and practical for industries with frequent purchases.
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Reduces record-keeping complexity compared to FIFO and LIFO.
Disadvantages
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Does not reflect actual purchase cost for a specific batch.
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Not suitable for perishable goods where FIFO is preferred.
Standard Price Method
Standard Price Method assigns a fixed predetermined price to all material issues, regardless of actual purchase cost. This price is set based on historical costs, estimated costs, or market trends and remains constant over a period.
Formula
Material Issue Cost = Standard Price per Unit × Units Issued
If actual purchase costs differ from the standard price, variance analysis is conducted to adjust financial records.
Example
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Standard Price Set: ₹10 per unit
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Purchases at Different Prices: ₹9, ₹11, ₹12
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Material Issues: Always recorded at ₹10 per unit
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Variance Analysis: Adjusts cost differences in accounting
Advantages:
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Simplifies accounting by keeping pricing uniform.
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Helps in budgeting and cost control.
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Useful for industries with stable material costs.
Disadvantages
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Ignores actual cost variations, leading to accounting discrepancies.
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Requires variance adjustments, increasing complexity in financial reporting.
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