Cost of material used does not create any problem if every item of like kind of materials is purchased at the same price. In actual practice however the market condition is not stable, there is fluctuation in the prices. Thus store ledger cards of a given item of material will show different prices of material, purchased at different times. Hence question arises, which of the price be charged to material issued.
Suppose an item ‘A’ is purchased in two lots say at the rate of $5 and $6 per unit. When this material is issued to a production department, question arises, if it is to be charged at the rate of $5 or $6 or $5.50 per unit. Thus there are different views. Before the issuance of material to production department, costing policy must be devised.
Methods of material costing
Different policies and methods of costing the material is used are as follows:
- (FIFO) First in first out
- (LIFO) Last in last out
- Weighted average method or Moving average method