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Standard Price Method Assignment / Homework Help
Standard Price Method:

      Under this method, all factors by which price may be effected are considered & before the actual price, standard material price for the materials is generally fixed. At that standard price materials issued are valued. For establishing standard price, the factors usually considered are-

(a) Due to possible changes in market conditions, apprehended changes in price.
(b) Depending upon the quantity to be ordered, the amount of discount that may be available from the suppliers.
(c) Expenses which are related to purchases i.e. freights & carriage, customs duty, godown expenses, packing, handling etc.

     Difference, if any, between the standard price & the actual purchase price, is known as material variance. However, the variance which arises due to the difference between standard rate of purchase & the actual rate of purchase is known as rate variance. On the other hand, variance due to difference between total actual material cost & total standard material cost, there being no difference in rates, the variance is called usage variance. Either at the time of actual purchase or at the end of accounting period, the variance may be worked out. The variance is analyzed into causative reasons &  by taking suitable measures its recurrence is prevented.

Advantages:

(a) Efficiency of the purchase department can be revealed.
(b) As all the issues are charged at a standard price, the method is easy to apply.
(c) Even if standard costing method is not applied in any industry, the method can be used there.
(d) By setting the standard price, control on material cost may be exercised by the method, which may be called the price that should be.

Disadvantages:

(a) At actual cost, the issues are not charged.
(b) Profit or loss on materials may be there.
(c) The purpose for which it is set may be spoiled by a very low or high standard price.
(d) Fixing a reliable standard price is difficult, since upon a number of unknown variable factors, the price depends.

Illustration 7:

 The purchases & issues of material A in the month of January, 2011 is as follows:

Jan       4          Purchase                      1600 units @ $ 10 per unit 
            8          Purchase                      1400 units @ $ 9 per unit
            9          Issue                            1200 units
            11        Issue                            1600 units
            17        Purchase                      1600 units @ $ 10 per unit
            25        Purchase                      1000 units @ $ 12.50 per unit
            31        Issue                            2000 units

At $ 10, the standard price per unit of material is fixed for the year 2011. Show the stores ledger entries & calculate the price variance for the month of January 2011.

           

Workings: Value of closing stock at standard price 800 units @ $ 10         $ 8000
                    Value of closing stock at actual cost as per stores ledger          $ 9100
                    Material Price variance (unfavorable)                                       $ 1100

4. Inflated Price Method:

        Normally, cost of material under any method is considered to be the invoice price plus freight, insurance, carriage etc. less discount (i.e. trade discount).  Under inflated price method, in addition to the above, the costs of placing orders, receiving, inspecting, storing & handling of materials are included in the cost of material, as well. On the basis of this cost, issues are charged. In other words, by including all costs incurred for materials till they are issued for production, the issue price of material is inflated; the cost being the invoice price (less trade discount) plus freight & insurance plus carriage plus cost of placing orders plus cost of receiving, inspecting, storing, handling etc.

     Thus, where under any method of charging the issues, items like cost of placing orders, cost of receiving, inspecting, storing, handling etc. are treated as elements of works overhead, under price method of charging the issues, they are treated as part of cost of direct material.

5. Re-use Price Method:

       When for any purpose other than the purpose for which it was acquired, any rejected material is used, the price charged to that purpose in respect of the rejected material issued to it, shall normally be lower than the cost of original material, but between the purchase price of the material for that purpose & the price charged, there should be some relationship. Let aluminium boxes be prepared by a metal box factory out of standard aluminium sheets. For toy making, the small scraps are re-used. In respect of aluminium scraps, the price charged to toy-making shall be less than the price of proportionate aluminium sheet, otherwise the cost of toy making on the basis of market price of aluminium cannot be guessed.

    Therefore, the price charged in respect of rejected materials issued to alternative use is represented by re-use price. This price is less than the cost of original material. This indicates that on materials there shall be profit or loss under re-use method.

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