## Material Issue Pricing — Average Price Methods

### (i) Simple Average Price Method

Issue price = Total of unit prices of all lots in stock ÷ Number of lots (regardless of quantities)

$$\text{Simple Average Price} = \frac{\sum \text{Price per lot}}{\text{Number of lots}}$$

Advantage	Disadvantage
Straightforward; easy to compute	Ignores quantities — inaccurate when lot sizes vary
Approximates market price in stable conditions	Not suitable when order quantities differ widely

### (ii) Weighted Average Price Method

Issue price considers both price and quantity of each lot:

$$\text{Weighted Average Price} = \frac{\sum (\text{Price} \times \text{Quantity})}{\sum \text{Quantity}}$$

A new weighted average is recalculated after every new receipt (but not after each issue).

Advantage	Disadvantage
Smooths out price fluctuations	Does not reflect actual/current cost
No recalculation needed per issue — only on new receipt	Recalculation needed every time a new lot arrives
Widely accepted; permitted under AS-2 / Ind AS-2	Profit/loss outcomes differ from other methods

> Exam tip: Weighted Average is the most commonly tested method and is accepted under accounting standards. Simple Average is rarely used in practice.

Worked example

### Example 1

Simple Average vs Weighted Average

Stock on hand:

Lot 1: 100 units @ ₹10
Lot 2: 400 units @ ₹15

Simple Average Price = (10 + 15) / 2 = ₹12.50 per unit

Weighted Average Price = (100×10 + 400×15) / (100+400) = (1,000 + 6,000) / 500 = ₹14.00 per unit

Issue of 300 units:

Simple Average: 300 × ₹12.50 = ₹3,750
Weighted Average: 300 × ₹14.00 = ₹4,200

The simple average undervalues the issue because it ignores that 80% of units were bought at ₹15.

### Example 2

Weighted Average — Recalculation After New Receipt

Opening balance: 200 units @ ₹20 (total ₹4,000)

New purchase: 300 units @ ₹25 (total ₹7,500)

New Weighted Average = (4,000 + 7,500) / (200 + 300) = 11,500 / 500 = ₹23.00

Subsequent issues (until next purchase): priced at ₹23.00 per unit.

Issue of 150 units = 150 × ₹23 = ₹3,450

Balance = 350 units × ₹23 = ₹8,050

⚠️ Common exam mistakes

Recalculating weighted average after every issue — it is only recalculated when a new lot is received, not after each issue.
Applying simple average when lot sizes differ significantly — this gives misleading results and is only appropriate when standard quantities are ordered.
Confusing 'weighted average' with 'moving average' — in Indian CA curriculum, weighted average (recalculated on each receipt) is the standard term.
Forgetting to update the total quantity in the denominator when computing weighted average after a new receipt.

Reference:

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Methods of Pricing Material Issues — Average Price Methods (Simple Average, Weighted Average)

Worked example

⚠️ Common exam mistakes