Market Price Methods Or Replacement Price Method
Replacement price method is also known as market price method. Replacement price is the price at which materials would be replaced. market price on the date of Issue is method is used when it is designed to reflect current prices in cost.
It is most suitable for business that buys large quantities of materials well in advance of requirements to take advantage of cheap prices the benefit of which is not desired to be passed on to the customer.
Advantages of Market Price Method
Following are the chief advantages of this method.
1. As far as calculations are concerned, it is simple to operate.
2. The material cost of the product reflects the current market price.
3. This method indicates the buying efficiency. If the replacement price charged to the materials issued to production is more than their purchase price, there is said to be efficient purchase of materials.
On the other hand, if the replacement price charged he the materials issued to production is less than purchase price, buying is supposed to be inefficient.
Disadvantages of Market Price Method
This method suffers from the following drawbacks –
1. This method involves the maintenance of up-to-date list of prevailing market prices. But it is not easy to maintain such a list.
2. It deviates from the costing principle, in the sense that issues are not priced at actual cost.
3. As issues are not priced at actual cost under this method, there may be profit or loss on the issue of materials.
4. Though issues are at current market prices, inventory valuation is not at current market prices.
Suitability – This method is suitable for giving tenders or quotations, because quotations should reflect the latest competitive market prices as far as materials are concerned.
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