## Average Price Methods of Material Valuation
These methods smooth out price fluctuations by using some form of average rather than the exact batch price.
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### 1. Simple Average Price Method
$$\text{Simple Average Price} = \frac{\text{Sum of unit prices of each purchase}}{\text{Total number of purchases made}}$$
> Quantities in each lot are ignored — only the prices are averaged.
Suitable only when: lots are uniform in size and prices are stable.
| Advantage | Disadvantage |
|---|---|
| Simple to understand and operate | Ignores lot size — unrepresentative when lots differ |
| — | Not suitable when prices fluctuate significantly |
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### 2. Weighted Average Price Method
$$\text{Weighted Average Price} = \frac{\text{Total cost of materials in stock}}{\text{Total quantity of materials in stock}}$$
Issue price is recalculated only when a new lot arrives; it remains constant between receipts.
| Advantage | Disadvantage |
|---|---|
| Accounts for quantity variations across lots | Still does not show actual cost of any specific batch |
| Issue price need not be recalculated on every issue | — |
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### 3. Periodic Simple Average Price Method
$$\text{Periodic Simple Average Price} = \frac{\text{Total of prices paid during the period}}{\text{Number of purchases in the period}}$$
Same logic as Simple Average but computed for a defined period; applied to all issues in that period.
Suitable when: quantities and rates differ across lots within the period.
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### 4. Periodic Weighted Average Price Method
$$\text{Periodic WAP} = \frac{\text{Total cost of purchases in the period}}{\text{Total quantity purchased in the period}}$$
Rate computed monthly; used for all issues AND closing stock valuation in that period.
Superior to Periodic Simple Average because it considers quantities, not just prices.
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### 5. Moving Simple Average Price Method
$$\text{Moving Simple Average} = \frac{\text{Sum of periodic simple average prices for } n \text{ consecutive periods}}{n}$$
Example (3-month moving): April rate = average of simple average prices for January, February, March.
Advantage: Evens out price fluctuations over a longer rolling window.
Disadvantage: Requires detailed periodic computations and monthly rate revisions.
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### 6. Moving Weighted Average Price Method
Same rolling-window concept as Moving Simple Average, but uses periodic weighted average prices for each period instead of simple average prices.