In this article we will discuss about Material Pricing:- 1. Objectives of Material Pricing 2. Problems of Material Pricing 3. Features 4. Determination.
Objectives of Material Pricing:
There are two main objectives of material pricing:
(a) To charge the cost of materials issued to production on a realistic and consistent basis.
(b) To provide a satisfactory basis of valuation of stock on hand on the closing day. The above objectives can be achieved by adopting simplest effective pricing system which is realistic from administrative point of view.
Problems of Material Pricing:
The following factors are responsible for making the problem of pricing materials issues more complicated:
(i) The stock of any given material is usually made up of several deliveries at different prices.
(ii) Rapidly changing prices for materials and components.
(iii) Difficulties in identifying items with their delivery consignment.
(iv) The sensitivity of profit calculations to the pricing method adopted especially where materials form a substantial part of total cost.
It is to be noted carefully that no one method has all the advantages. So, it is necessary to use the most appropriate system to fulfil the requirements of a particular situation.
Feature of Material Pricing:
When an issue is made from Stores, the Materials Requisition from the production department is passed to the Cost Department to be priced so that the appropriate ledger entries can be made.
The entries would be:
Determination of Material Pricing:
(a) Trade discount:
Trade discount is an allowance or reduction in price given by a supplier to a retailer. It is allowed to cover the expenses and profit of the retailer. In arriving at the material cost price the amount of trade discount is deducted from the purchase price.
(b) Quantity discount:
It refers to the allowance made by the supplier to all large users of the product. It is an inducement to the buyer to encourage him to place bulk orders. The buyer enjoys the economies of bulk purchase. The discount varies according to the size of the order. It is deducted from the purchase price in arriving at the material cost price.
(c) Cash discount:
Cash discount is an allowance offered by the supplier to his customers for making payment within a stipulated time. Since it is a matter of financial nature, it is not considered as an element of cost in cost accounts.
(d) Freight and Carriage:
Freight or other transport charges incurred on incoming materials are treated as part of cost and hence, should be included in material cost price. Freight and transport charges include sea, land and air freight, insurance, duties, dock charges, import duties etc. Where such costs are small and to be apportioned over a number of items included in the consignment, it is expedient to treat such charges as factory overhead
(e) Value added tax:
It is excluded from the cost of materials and debited to a separate account like VAT Account and later on set off against VAT collected from sales.
Treatment of cost of container varies as follows:
(a) If the buyer of materials does not pay for the container, no accounting entry is required. But if the containers are sold, the sale proceeds is to be credited to the overhead.
(b) Where the buyer has to pay for the containers and the containers are not returnable, cost price of such containers should be added to the cost of materials.
(c) When the containers are separately charged but they are returnable at a price less than the price charged, the difference is to be added to the cost of material. But if they are accepted by the supplier at charged out price, the cost of such containers is not to be added to the cost of the material.