General Principles of Intellectual Property: Concepts of Intellectual Proper...
Average cost method
1. Amity Global Business School
Presentation on :
Average Cost Method
Presented by: Prashant Ranka
Date: 27/09/2012
2.
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
3.
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.
4.
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
5.
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.
6.
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
