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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.
Also Read – What is Cost of Labour Turnover | Causes, Effects Classification
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.
Also Read – What is Periodical or Annual Inventory Control System | Limitations
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.
Also Read – What is Perpetual Inventory System| Advantages and Disadvantages
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.
Related Links
- Meaning of Cost Accounting | Nature and Scope of Cost Accounting
- Cost Accounting | Purpose or Functions of Cost Accounting
- Advantages and Disadvantages of Cost Accounting
- Difference between Cost Accounting and Management Accounting
- What is Cost Concepts and Different Terms of Costs
- What is concept of Cost Audit | Objective and Scope of Cost Audit
- Advantages and Disadvantages of Cost Audit
- Meaning of Methods of Cost | Basic Methods of Costing
- What is meaning of Classification of Cost & elements of Cost | rules of Cost Accounting Standard
- What is Installation of a Costing System | Conditions and Factors
- What are the practical difficulties in installing cost accounting
- What is technique of Costing | Various techniques of Costing
- What is Material or Inventory Control | Techniques of Materials Control
- What is FIFO Method | advantages and disadvantages
- What is LIFO method | Advantages and Disadvantages
- What is Periodical or Annual Inventory Control System | Limitations
- Methods of Pricing Material Issues | Cost Methods
- What is Cost of Labour Turnover | Causes, Effects Classification
- What is meant by idle time | Definition, Causes, Control
- What is meaning of overtime work | Reason, Disadvantages
- HIFO method of inventory valuation |Advantages, Disadvantages
- What is two Bin System | Meaning of Bin Card and Specimen
- What is Meaning of NIFO Method | Advantages, Disadvantages
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