1. SCM (Supply Chain Management)
  2. Item Record Management
  3. Item Costing
  4. Standard Costing
  5. Standard Costing Example

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.

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

General Notices