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Market Price Method

The following three methods come under its purview:

(i) Replacement price method: Under this method the issue of materials is priced at the replacement price on date when the materials are issued. Replacement price is the price at which similar materials can be replaced by fresh purchase from the market. In other words, it is current value of the identical material. This is the case of this the cost of materials is altogether ignored.

The method has the following advantages:

1. It takes into account the principle that a customer expects to buy at the current price. The manufacturer is entitled to take the benefit of rising when he also runs the risk of loss on falling prices.

2. The method is most suitable when quotations or tenders have to be made because they are to be quoted at competitive price.

3. The method will also show whether the buying is efficient or not. The stores account will show a profit in case of efficient buying and loss in the reverse case.

The method suffers from the following drawbacks:

1. It makes the stores records unnecessary complicated by taking into account the profit or loss factor. Cost accounts are concerned with costs and, therefore, profit or loss element should be ignored.

2. The method is away from cost of materials and, therefore, it does not disclose in the stores record the full value of materials unless the market price happens to coincide with the purchase price.

On account of these disadvantages the method is rarely used. It may, however, be applied in cases where materials have been purchased in advance for use in large quantities in anticipation of economic or profitable use.

(ii) Realizable value method: The price at which material to be issued can be sold in the market is the realizable value. Materials issued are price at this value under this method. The method has almost same advantages and disadvantages as in case of replacement price method.

(iii) Re-use price method: When processed material is put some use, other than for the purpose it is meant, the same is priced at a rate different than its actual cost at the time of issue. This is usually the price at which the material is available for which the reprocessed material has been used. If this may result in some profit or loss in the stores ledger which has to be suitably adjusted in the costing books as per the accounting policy (e.g. transfer to costing profit and loss account or factory overheads account) adopted by the firm.