## Material Issue Pricing — Market Price & Notional Price Methods

### Market Price Methods

#### (i) Replacement Price Method

Issues are valued at the current cost to purchase an identical item (replacement cost).
Objective: Determine product cost at the current market price.
Most useful during rising prices — ensures production cost reflects the cost of replenishing materials.
Results in profit/loss entries in the Stores Ledger (difference between purchase cost and replacement cost).

#### (ii) Realisable Price Method

Issues are priced at the price at which the material could be sold in the market.
Also results in profit or loss in the Stores Ledger.
Requires continuous knowledge of market selling prices.

### Notional Price Methods

#### (i) Standard Price Method

Materials issued at a predetermined standard price fixed in advance, regardless of actual purchase cost.
Standard is set based on: current prices, anticipated market trends, available discounts, transport charges.
Variance (actual cost vs standard cost) is analysed separately to evaluate purchasing efficiency.

Advantage	Disadvantage
Simplifies valuation	Does not reflect actual market price
Facilitates cost control	Difficult to set when prices fluctuate frequently
Reduces clerical work	Profit/loss calculations may be distorted

#### (ii) Inflated Price Method

Used when materials lose weight or volume due to natural/climatic factors (evaporation, shrinkage).
The issue price is inflated to compensate so that the total cost is recovered from good output.

Formula:

$$\text{Inflated Price} = \frac{\text{Total Cost of Lot}}{\text{Net Usable Quantity}}$$

#### (iii) Re-use Price Method

Applied when rejected or returned materials are reissued for a different purpose.
Priced at a rate different from the original purchase price (reflecting reduced utility).
No specific standardized valuation procedure.

Worked example

### Example 1

Standard Price Method — Purchase Variance

Standard price set = ₹50/kg

Actual purchase = 1,000 kg @ ₹54/kg

Materials issued to production at standard price = 1,000 × ₹50 = ₹50,000

Actual cost = ₹54,000

Purchase Price Variance = (Standard – Actual) × Quantity = (50 – 54) × 1,000 = ₹4,000 Adverse

The variance is debited to a Price Variance Account and investigated (supplier increase? poor buying?). Production is charged consistently at ₹50 regardless of when materials are bought.

### Example 2

Inflated Price Method

Purchase: 1,000 litres of solvent @ ₹40/litre = ₹40,000

Expected evaporation loss: 10% (100 litres)

Usable quantity = 900 litres

Inflated Issue Price = ₹40,000 / 900 = ₹44.44 per litre

When 900 litres are issued at ₹44.44, total charged = ₹40,000 — full cost recovered despite physical loss.

⚠️ Common exam mistakes

Confusing Replacement Price (what it costs to buy now) with Standard Price (predetermined rate based on expected costs) — they are conceptually distinct.
Forgetting that Replacement and Realisable Price methods show profit/loss in the Stores Ledger — unlike cost-based methods, these create valuation differences.
Applying Inflated Price to abnormal losses — inflation of price compensates only for normal, expected losses (evaporation etc.), not abnormal losses.
Thinking Standard Price removes the need for variance analysis — the whole point is that variances are tracked separately to measure purchasing efficiency.

Reference:

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Methods of Pricing Material Issues — Market Price and Notional Price Methods

Worked example

⚠️ Common exam mistakes