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Hi sir,
When materials are used regularly we have to consider the Replacement Cost of that material right? So for example if I use material a regularly in my business say I have a 100 kgs in my inventory I had initially bought them for 4 per kg now the price is 5 per kg and let’s say for a contract I need about 500 kgs of this material so while costing I will account this cost is 500 X 5 equal to 2500 but I initially bought 100 kgs for just 4 Rupees and the rest 400 kg for 5 rupees so my actual expenses cash expenses incurred is 2400 so when I’m accounting the actual expenses as 2500 am I not overstating the cost Am i not also indirectly increasing my profit by an amount that I actually did not spend?
We are concerned more with the cash that will be paid rather than the reported profits.
Therefore what matters is the cash that will have to be paid for replacing the materials.
Have you not watched my free lectures on this? The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
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