How is the Moving Average Price calculated when price variances occur?

The Moving Average Price (MAP) is a method used to calculate the average cost of a material over time, considering price fluctuations due to variances. When price variances occur, the MAP is calculated by summing the total costs of the quantities received and dividing that sum by the total quantities received. This approach ensures that the price reflects the actual cost of the materials as they are acquired over time.

In this context, summing the prices allows for the incorporation of the most recent costs, which is essential in managing inventory valuation and ensuring that financial records accurately represent the current market conditions. This averaging method maintains a balance between the historical cost and the impact of recent purchases, which is fundamental for financial reporting and inventory management.

The other options may not consistently provide an accurate or timely reflection of current costs. For instance, averaging the last three invoices might not capture the most relevant data if significant changes occurred outside of those invoices. Using the latest purchase order might ignore prior costs that influence the overall price. Checking the market price does not take into account the actual purchase costs incurred by the organization, which is critical for effective accounting and inventory valuation.