CA Intermediate · Cost and Management Accounting · Material Cost
Which of the following is an advantage of the Weighted Average Price method of pricing material issues, as compared with FIFO, in a period of fluctuating purchase prices?
The weighted average method smooths out price fluctuations because the issue price is the total cost of material in stock divided by total quantity, so it does not jump with every purchase. FIFO charges the oldest lot price, and valuation at the latest price is a LIFO feature.
- AIt values closing stock at the most recent purchase price
- BIt smooths out price fluctuations so that issue prices do not change with every receiptCorrect
- CIt charges production with the oldest purchase price
- DIt ensures every issue is priced at actual cost of a specific lot
Explanation
Weighted average price is recomputed by dividing total cost of stock by total quantity, so it averages out price swings. Closing stock at latest price and charging oldest price relate to LIFO and FIFO respectively. Pricing at the specific lot cost belongs to the specific identification approach, not weighted average.
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