Methods of Pricing Material Issues

Base Stock & HIFO

Actual Cost Methods
Base Stock Method:
• The method is based on the contention that each enterprise maintains
at all times a minimum quantity of materials in its stock. This quantity is
termed as base stock. The based stock is deemed to have been created
out of the first lot purchased and, therefore, it is always valued at this
price and is carried forward as fixed asset.
• Any quantity over and above the base stock is valued in accordance with

us
any other appropriate method. As this method aims at matching current
costs to current sales, the LIFO Method will be most suitable for valuing
Pl
stock of materials other than the base stock. The base stock method has
e
ac

the advantage of charging out materials at actual cost.

iR

Suitability:
) ar

This method is considered suitable under the following cases:

34 ak
53 h

1. When there is the need of maintenance of base stock for emergencies.

Sa

2. When the objective is to charge the issue to production at current prices.

Highest-In-First Out (HIFO) Method:
93
36

• Under this method materials issued are charged at the rate of highest
81

priced materials in stores. This highest rate is continued to be used until

j(

material at that highest price is exhausted, after which the next highest
A

price is used. Thus, in HIFO method, the production absorbs the high
cost of materials and closing stock is valued at lower rates.
• The HIFO method has the advantage that in fluctuating market, the
highest cost of materials is recovered first and inventory valuation is
kept at the lowest which is tantamount to creating a secrete reserve.
 This method is not popular but is used ‘cost plus contracts’ with
advantage.
• Suitability:
• This method is suitable for pricing of materials issued to cost plus
contracts and monopoly products. But today, this method is not popular
and it is not adopted widely.

us
Pl
e
ac
iR
) ar
34 ak
53 h
93 Sa
36
81
j(
A