Page 46 - Accountancy_F5
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Advantages of WAM Disadvantages of WAM
(i) It is consistent and logical: (i) It involves a lot of clerical work:
Accounting for consistency in It indicates that a great deal of
reporting, the weighted average cost paperwork and physical labour,
method determines the average cost such as data entry, form completion,
of inventories for sale. This approach and document organisation, are
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is useful for valuing inventory even involved. This demonstrates how
though it may not match actual market labour intensive the work is and
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pricing, especially for stable prices how important it is to finish the
or comparable items, and can help administrative duties in order to
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ensure accurate financial reporting proceed.
and decision-making. (ii) It is complex and inconvenient when
(ii) Fluctuations in prices have no prices change frequently:
significant effect on the cost of issues
of inventories: Handling associated activities gets
This suggests a degree of stability more difficult when prices fluctuate a
despite market swings by implying lot. This entails managing inventories,
that price adjustments usually do calculating finances, modifying
not materially influence the cost prices, and communicating with other
of inventory issued. The precise stakeholders. It may also be necessary
accounting and inventory management to make frequent changes to plans and
procedures used will, however, to update documentation and systems
determine the actual effects of price more often.
adjustments. (iii) The average cost is not the actual
price and therefore it is not realistic:
(iii) The issue process does not need to be It may not be accurate to determine the
calculated unless new materials are true cost of goods or services based
received:
Inventory control is crucial while just on average cost since it does not
display the precise price of each item.
fresh materials are arriving, just like This may produce misconceptions
when products are issued from stock. regarding the financial aspect of
It makes clear that keeping track of the things, which might influence
issue process is only necessary when decision-making.
there are fresh materials to balance,
and that inventory management and
material flow are closely related.
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