Under this method, the rate for material issues is determined by dividing the total of the periodic simple average prices of a given number of periods by the numbers of periods. For determining the moving simple average price, it is necessary to fix up first period to be taken for determining the average. Suppose a six monthly period is decided upon and moving, average rate for the month of June is to be calculated. Under such a situation, we have to make a list of the simple average prices from January to June, add them up, and divide the total by six. To calculate the moving average rate for July, we have to omit simple average rate pertaining to January and add the rate relating to July and divide the total by six.
This method evens out price fluctuations over a longer period, thus stabilizing the charges to work-in-progress. Thus the cost of production will be stable to a significant extent.
A profit or loss arises by the use of moving simple average cost.