Simple Average Method in Cost Accounting
Simple Average Method, introduced by M. Vijayasekaram, is a technique used for inventory valuation and delivery cost calculation. It involves calculating the average unit cost by multiplying the total unit costs with the number of receiving instances. This method simplifies calculations and reduces clerical work. While advantageous for uniform lot quantities and ease of operation, it may lead to erroneous costs if quantities vary widely. This method values material issues based on average unit prices, making it beneficial in scenarios with minimal price fluctuations.
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SIMPLE AVERAGE METHOD M.VIJAYASEKARAM
Simple Average Method It is a method for inventory valuation or delivery cost calculation, where even if accepting inventory goods with different unit cost, the average unit cost is calculated by multiplying the total of these unit costs simply by the number of receiving. The example of Simple Average Method is as follows. In this case, the total of unit costs received for the period from 1st to 24th is 900 yen, and the time of receiving is four, which means average receiving unit cost is 225 yen. The inventory valuation (9,000 yen) is obtained by multiplying the average unit cost (225 yen) by the balance (40).
Simple Average Method, Its Advantages And Disadvantages Concept Of Simple Average Method In simple average method, issue price of materials are fixed at average unit price. Simple average is an average of price without considering the quantities involved. The average price is calculated by dividing the total of the rates of the materials in the stores by the number of rates of prices. Advantages Of Simple Average Method Main advantages of simple average method are as follows: 1. Simple average method is very suitable when materials are received in uniform lot quantities. 2. Simple average method is very easy to operate. 3. Simple average method reduces clerical work.
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. 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.
Disadvantages Of Simple Average Method Major disadvantages of simple average method are as follows: 1. If the quantity in each lot varies widely, the average price will lead to erroneous costs. 2. Costs are not fully recovered. 3. Closing stock is not valued at the current assets.
