Fixed standard stock price

What it means

A fixed standard stock price is a predetermined price at which inventory is carried in stock regardless of the actual purchase cost. The difference between the fixed and actual price is tracked separately as a price variance and released into expenses in proportion to consumption.

It is an alternative to valuing issues at weighted average cost or by FIFO. A fixed price simplifies records: every issue of material carries the same price, so movements need not be recalculated with each new purchase.

It is used mainly in manufacturing, where it ties in with standard costing and planned costing. The gap between plan and reality shows up in the variance, which helps management spot rising input prices or inefficient purchasing.

How it works in practice

The fixed price is usually set for a year, for example from planned purchase prices. On receipt, stock is booked at the fixed price and the difference against the invoice goes to a variance account. On issue, a proportional share of the variance is released together with the fixed price so the expense reflects reality.

If prices change significantly, the fixed price must be updated, otherwise variances balloon and the valuation loses its meaning. The method must be described in the accounting policy and applied consistently so that the financial statements fairly show the value of inventory.

In the stock records movements are easy to follow and management can readily compare consumption with plan. For small trading firms whose purchase prices change often, however, the method is needlessly complex and a simple weighted average usually suffices.

What to watch out for

The variance balance at year end must correspond to the stock on hand. If variances are not released correctly, inventory is over- or understated and profit distorted, which is usually the first thing an auditor notices.

The fixed price must not replace measurement at cost; it only makes recording easier. The fixed price plus the variance must always equal the actual cost of the inventory, otherwise the valuation rules are breached.