Item Costs and Valuation Methods: Standard Method

The Standard valuation method uses a predetermined cost of goods, which is not recorded or calculated by the system automatically, but set up in the system by a user. Manufacturing companies calculate the standard cost of an item by considering fixed labor, materials, and overhead costs for each unit produced. Retail companies include in the standard cost various expenses, such as shipping, customs fees, packaging, and other related costs within their overall company expenses. Because standard costs often slightly differ from actual costs, companies regularly assess differences caused by changes in labor rates and material costs. To better match actual costs, companies can periodically adjust their standard costs.

You assign the Standard valuation method to a stock item or non-stock item by specifying Standard in the Valuation Method box on the General tab of the Stock Items (IN202500) or Non-Stock Items (IN202000) form, respectively. If the Standard method is assigned to an item, the unit cost specified in the Current Cost box in the Standard Cost section on the Price/Cost tab of the corresponding form will be used for the item in inventory and sales transactions.

Setting Up a Standard Cost

If the Standard method is assigned to a stock item or non-stock item, you specify a predefined unit cost in the Pending Cost box on the Price/Cost tab of the Stock Items (IN202500) or Non-Stock Items (IN202000) form, respectively. Then you click Update Cost on the More menu of the corresponding form. The system copies the cost from the Pending Cost box to the Current Cost box and clears the Pending Cost box. The item's cost is specified in a base UOM.

If the Current Cost for a newly created item with the Standard method has not been specified by a user, its cost is considered as 0.

Note: The Effective Date shows the date when the current standard cost became effective only for non-stock items on the Non-Stock Items form. For stock items on the Stock Items form, the current standard cost becomes effective after it has been updated.

For items with the Standard valuation method, standard costs can be maintained for each warehouse separately if the Override Standard Cost check box on the Price/Cost tab of the Item Warehouse Details (IN204500) form is selected for the item stored at a particular warehouse.

Tracking of Costs for Items with the Standard Method

When an item is received in a warehouse, its quantity and unit cost are recorded in a cost layer, which is identified by the warehouse. The item's cost is not updated when a new receiving document is released.

If an item whose actual unit cost differs from a predefined standard unit cost is received and the transaction is posted to the general ledger, any differences between the standard cost and the actual unit cost in the receiving document are recorded to a standard cost variance account.

For items with the Standard valuation method, when you add an item to an inventory issue, the system specifies the standard unit cost in the Unit Cost box on the Issues (IN302000) form.

Update of Standard Costs

You can revise standard costs at the end of the financial year based on the year’s financial results or update the costs more often.

If you want to update standard costs for multiple inventory items, you use the Update Standard Costs (IN502000) form. Also, you can use the Standard Cost Change Preview (IN617500) report to review the changes before you update standard costs. When standard costs are updated and inventory is revalued for multiple inventory items, the system generates a consolidated inventory adjustment on the Adjustments (IN303000) form for the items being processed to make the necessary cost corrections. The consolidated inventory adjustment is generated on the current business date.

Attention: If multiple branches are used in the system, a separate inventory adjustment is created for each branch.

You can change the settings of the standard cost for an item stored at a particular warehouse by using the Item Warehouse Details (IN204500) form as follows:

  1. Select the Override Standard Cost check box on the Price/Cost tab of the form
  2. Update standard costs by using the Update Standard Costs form

The system does not keep a history of the standard costs for both stock items and non-stock items, displaying only the last cost and current cost values on the Price/Cost tab of the Stock Items (IN202500) or Non-Stock Items (IN202000) form, respectively. The historical costs that were effective before the last cost are not stored in the database.

Example of Cost Calculation for the Standard Method

Suppose that a stock item with a standard cost of $2.50 was purchased in the following way:

  • Cost layer 1: 100 items at $2.00 each
  • Cost layer 2: 100 items at $1.90 each
  • Cost layer 3: 100 items at $2.30 each
  • Cost layer 4: 100 items at $2.60 each

The total stock cost is $1000. Any differences between the standard cost and the unit cost on receipts multiplied by the quantity on the receipt are recorded to the standard cost variance account. In this case, $50, $60, $30, and –$10 respectively. On sales orders, the unit cost will appear as $2.50.