The correct answer is: D. None of these.
The average cost method of valuing material issues is suitable when prices are relatively stable. When prices are rising or falling, the average cost method will not provide an accurate reflection of the cost of materials used.
Under the average cost method, the cost of materials issued is calculated by dividing the total cost of materials on hand at the beginning of the period by the number of units on hand at the beginning of the period, plus the number of units issued during the period. This method is simple to use and provides a consistent cost of materials used over time. However, it can be inaccurate when prices are volatile.
When prices are rising, the average cost method will underestimate the cost of materials used. This is because the cost of materials on hand at the beginning of the period will be lower than the cost of materials purchased during the period. As a result, the average cost per unit will be lower than the actual cost per unit.
When prices are falling, the average cost method will overestimate the cost of materials used. This is because the cost of materials on hand at the beginning of the period will be higher than the cost of materials purchased during the period. As a result, the average cost per unit will be higher than the actual cost per unit.
For these reasons, the average cost method is not suitable when prices are rising or falling. In these cases, a more accurate method of valuing material issues, such as the first-in, first-out (FIFO) method or the last-in, first-out (LIFO) method, should be used.