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Simple Average Method: Advantages

The simple average method calculates inventory costs by adding the costs of all purchases and dividing by the total number of purchases, regardless of quantities. This provides a single average cost per unit. It is simple to calculate but does not consider varying purchase quantities. It is best for stable purchase quantities and mild price fluctuations, where identity of materials can be mixed without issue. However, it may result in profit/loss and inaccurate closing stock values when lot sizes vary significantly.

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45 views2 pages

Simple Average Method: Advantages

The simple average method calculates inventory costs by adding the costs of all purchases and dividing by the total number of purchases, regardless of quantities. This provides a single average cost per unit. It is simple to calculate but does not consider varying purchase quantities. It is best for stable purchase quantities and mild price fluctuations, where identity of materials can be mixed without issue. However, it may result in profit/loss and inaccurate closing stock values when lot sizes vary significantly.

Uploaded by

Medha Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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SIMPLE AVERAGE METHOD

Under this method, simple average rate at cost is obtained by adding the rate of purchases
represented by stock at the time of issue and then dividing the same by the number of such rates.
The rates need to be revised at time of new purchase or exhaustion stock. For the purpose of
ascertaining the average rate, the quantity by which each purchase is made has to be ignored
To dampen the severity of the effects of rises and
falls in the purchase price, use of any kind of average rate is made. Thus, in case of fluctuating
rates of purchase, average cost is used. However, obviously cost does not get properly
represented by the average cost.
Under this method all the materials received are merged into existing stock of materials, their
identity being lost. The simple average price is calculated without any regard to the quantities
involved. The simple average cost is arrived at by adding the different prices paid during the
period for the batches purchased by dividing the number of batches. For example, three batches
of materials received at Rs. 10, Rs. 12 and Rs. 14 per unit respectively.

The simple average price is calculated as follows:


Rs. 10 + Rs. 12 + Rs. 14/3 batches = Rs. 36/3 batches = Rs 12 per unit
This method is not popular because it takes into consideration the prices of different batches but
not the quantities purchased in different batches. This method is used when prices do not
fluctuate very much and the stock values are small in value.

Advantages:
 It is simple to work out and apply
 Issue price cannot be affected considerably by the fluctuations in prices and purchase
 Average cost method is suitable for the conditions when different lots of purchases get
mixed up so that the identification is not possible
 Where the quantity of each purchase is stable but the prices fluctuate, average cost
method suits the conditions

Disadvantages:
 Profit or loss in material arises as total cost incurred usually does not become
equal to the total wages
 Frequent calculations of rates will be necessary in case of frequent purchases,
thereby involving much clerical work. Average rate may have to be revised due to
exhaustion of an existing stock even if no new purchase comes
 Too much of profit or loss on material may be resulted from this method. when lot
of purchases vary much in quantities
 Due to the fact that that identity of material are disappeared in the store, the
verification of closing stock becomes difficult
 Absurd figures may be shown by the closing stock. The closing stock account
even show credit balance, in times of inflationary spiraling.

Suitability:
 In each lot, there is standard quantity of purchases
 There is very mild fluctuations in price

Example:
1. A XYZ television supplier found a demand of 200 sets in July, 225 sets in August & 245 sets
in September. Find the demand forecast for the month of October using simple average method.
The average demand for the month of October is

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