Standard Costing Example

1. After you set item record A to use Standard Costing, you enter the following cost versions and standard costs for Item A:

   Item	Cost Version	Standard (Fixed) Cost	Cost Category
   Item A	Q3 2020	$7.00	Material: metal
   Item A	Q4 2020	$6.00	Material: metal
   Item A	Q1 2021	$7.00	Material: metal

   To itemize costs in separate cost categories, you can assign a cost category to each cost version.

2. To set standard production cost using the Q3 2020 cost version, run a bulk inventory revaluation.

   The cost is used for transactions and records entered on and after that effective date based on the effective date assigned to the cost version.

   Item	Cost Version	Standard (Fixed) Cost	Cost Category	Effective date
   Item A	Q3 2020	$7.00	Material: metal	July 1, 2021

3. The transaction entered for Item A on August 1, 2021 identifies a cost category of Material: metal and has a fixed standard cost of $7.00.

Comparisons can now be made to discover whether the costs incurred for Item A are higher, lower, or as expected. For example, you enter a receipt for a shipment of Item A on August 10, 2021. The cost on the receipt is $10.00. You can track the cost variance.

• Standard cost on August 10 = $7.00

• Actual cost on August 10 = $10.00

• The difference between standard and actual cost is (10 - 7 = 3)

  A variance posts for the difference:

  • $7.00 posts to the inventory asset account

  • $3.00 posts to the variance account

Posting Purchase Price Variance Intermittently

Intermittent Posting Purchase Price Variance amounts can be effected by rounding corrections. This can happen when items use cost component lines contain costs that require less than 0.01 precision on the effective inventory revaluation. Since rounding is applied by cost component lines as transactions are created for an item, the system makes balancing adjustments.

When an item uses standard costing, the transaction item cost is the sum of the element cost from the effective inventory revaluation.

Each cost element is rounded according to its subsidiary base currency. As the system perform rounding during cost calculations, variances per cost element can differ. The more cost element the item has, the higher the possible variance.

Standard Costing Variance Example

1. As at January 1, the Toronto and Brno locations have the following standard cost item revaluation:

   New Unit Cost is 5.05292175:

   • Material Cost Category: 2.85

   • Material Overhead Cost Category 1: 0.9405

   • Material Overhead Cost Category 2: 0.17087175

   • Landed Cost Category 1: 0.03705

   • Landed Cost Category 2: 0.03705

   • Landed Cost Category 3: 0.171

   • Landed Cost Category 4: 0.171

2. On January 2, an inventory adjustment of 183 was applied to the Toronto location with the following general ledger impact:

   Account or Accounting Line Type	Amount	Location
   Adjustment Account	-924.68	Toronto
   Asset Account	924.68	Toronto

3. On the same day an inventory adjustment of 360 was made to the Brno account:

   Account or Accounting Line Type	Amount	Location
   Adjustment Account	-1819.05	Brno
   Asset Account	1819.05	Brno

4. January 3 saw an inventory transfer of 6 from Brno to Toronto:

   Account or Accounting Line Type	Amount	Location
   Asset Account	30.31	Toronto
   Asset Account	–30.31	Brno
   PPV Account	0	Toronto

5. On January 3 an inventory transfer of 348 was sent from Brno to Toronto:

   Account or Accounting Line Type	Amount	Location
   Asset Account	1758.44	Toronto
   Asset Account	–1758.41	Brno
   PPV Account	0.03	Toronto

6. On January 3 an inventory transfer of 6 was sent from Brno to Toronto:

   Account or Accounting Line Type	Amount	Location
   Asset Account	30.30	Toronto
   Asset Account	–30.33	Brno
   PPV Account	0.03	Toronto

On step 5 and 6 there is a PPV line of 0.03 despite both Toronto and Brno having same standard cost. The inventory transfer in step 6 has a different impact than step 4 even though the quantities are the same.

After step 6 Brno’s on hand quantity 0. If the same cost was used in step 6 as was used in step 4, the ending inventory asset account value should be 0.02. This is incorrect since there is no quantity at the Brno location because the system makes cost balancing adjustments.

Related Topics

Standard Costing Workflow

Enabling Standard Costing

Creating Cost Categories

Creating Inventory Cost Templates

Setting Up Item Records for Standard Costing

Defining Cost Versions

Entering Planned Standard Cost Records

Standard Cost Rollup

Revalue Standard Cost Inventory

Standard Costing and Transactions

Assembly Build Production Cost Variances

Standard Costing FAQ

Standard Costing Reporting

Standard Costing

General Notices