Updating Standard Costs
What do you mean by standard costing?
Standard costing is the practice of substituting an expected cost for an actual cost in the accounting records. Subsequently, variances are recorded to show the difference between the expected and actual costs.
However, it may be necessary to update standard costs frequently, if actual costs are continually changing. It is easiest to update costs for the highest-dollar components of inventory on a frequent basis, and leave lower-value items for occasional cost reviews. At the end of the accounting period, use the actual amounts and costs of direct material.
For resources with a basis of lot, WIP automatically charges the resource’s usage rate or amount multiplied by the resource’s standard cost upon completion of the first assembly in the operation. The standard cost update is a batch process that can run while you perform normal transactions.
Standard costing is the practice of substituting an expected cost for an actual cost in the accounting records. Subsequently, variances are recorded to show the difference between the expected and actual costs. This approach represents a simplified alternative to cost layering systems, such as the FIFO and LIFO methods, where large amounts of historical cost information must be maintained for inventory items held in stock. AccountDebitCreditSubinventory material overhead accountXX-Inventory material overhead absorption account-XXUse non-standard expense jobs for such activities as repair and maintenance.
The following graphic displays that variance accounts are charged upon job or period close, depending on how the WIP (WIP) parameters are set (for repetitive schedules) or the type of job, asset, or expense. You can calculate and report usage and efficiency variances based on planned start quantity or the actual quantity completed. You can use the planned start quantity to check potential variances during the job or repetitive schedule.
Overview of Standard Costing
In addition, the period close process automatically recognizes variances on all non-standard expense job charges incurred during the period. Therefore, open non-standard expense jobs have zero WIP accounting balances at the start of a new period. The period close process in Inventory recognizes variances for non-standard expense jobs and repetitive schedules. Use the Completion Transactions window, Move Transactions window, and Inventory Transaction Interface to move completed assemblies from WIP into subinventories.
This leaves an unallocated balance (variance) that is due to one or more standard cost updates that must have occurred since the original sales order issue. This variance is created using the item COGS account, but the line type is the standard cost update adjustment account. The COGS account should be replaced in subledger accounting (SLA) with an actual standard cost update adjustment account. You can receive purchased items associated with outside resources from an outside processing operation back into WIP in Oracle Purchasing.
Usage and efficiency variances result when the total costs charged to a job or schedule do not equal the total costs relieved from a job or schedule at standard. Charges occur from issues and returns, resource and overhead charges, and outside processing receipts. Cost relief occurs from assembly completions, scrap transactions, and close transactions. The result does not exactly match the actual cost of inventory, but it is close.
Use non-standard asset jobs to upgrade assemblies, for teardown, and to prototype production. Because you have already earned overhead to produce the assemblies as you are repairing or reworking, WIP prevents you from double earning material overhead on these assemblies. For resources with a basis of item, WIP automatically charges the resource’s usage rate or amount multiplied by the resource’s standard cost upon completion of each assembly in the operation.
Valuation accounts are charged when material is issued to a job or schedule, or when resources, outside processing, or overhead are earned by a job or schedule. Valuation accounts are also relieved when assemblies are completed from a job or schedule.
- Valuation accounts are charged when material is issued to a job or schedule, or when resources, outside processing, or overhead are earned by a job or schedule.
Efficiency variance can also include rate variance as well as quantity variance if you charged resources or outside processing at actual. This account is used to collect the changes in value to each item, and to automatically generate transactions that adjust your inventory accounts. Your inventory is adjusted by subinventory and elemental cost account. The WIP accounting class defines the adjustment account for your discrete jobs.
Bills and Cost Rollups
You can use the actual quantity completed to check the variances before the job or period close. Your choice of planned start quantity or actual quantity completed determines the standard requirements. These standard requirements are compared to the actual material issues, resource, outside processing, and overhead charges to determine the reported variance. Under standard costing, predetermined costs are used for valuing inventory and for charging material, resource, overhead, period close, and job close and schedule complete transactions.
Differences between standard costs and actual costs are recorded as variances. Referenced RMA’s are returned at the original sales order issue cost.
Then utilize the actual amounts and pay rates of direct labor to compare it to the previously set standards. When you compare the actual costs to the standard costs and examine the variances between them, it allows managers to look for ways to improve cost control, cost management, and operational efficiency. A standard costing system involves estimating the required costs of a production process. In addition, these standards are used to plan a budget for the production process. You can close discrete jobs and recognize variances for non-standard expense jobs at any time.
For these items, WIP creates resource transactions at the standard or actual rate for all outside resources with an auto charge type of PO receipt or PO move. WIP reports usage and efficiency variances as you incur them, but does not update the appropriate variance accounts until you close a job or period. WIP updates the standard cost adjustment variance account at cost update.
WIP automatically reverses these charges during a backward move transaction. You can automatically charge resources at their standard rate to a job or repetitive schedule when you perform a move transaction using either the Move Transactions window or the Open Move Transaction Interface. They identify the difference between the amount of material, resources, outside processing, and overheads required at standard, and the actual amounts you use to manufacture an assembly.
What are standard costs in accounting?
The Standard Costing feature in NetSuite enables manufacturers and wholesale distributors to identify and correct problems with inventory costing issues by giving insight into costing variances and their causes. Using Standard Costing, you maintain standard costs across cost categories for an item.
Completion transactions relieve the valuation account of the accounting class and charge the subinventory accounts (for example, finished goods) based upon the assembly’s elemental cost structure. WIP automatically charges appropriate overhead costs as you move assemblies through the shop floor. You can charge overheads directly based on move transactions or based on resource charges. For overheads charged based on move transactions with a basis of item, WIP automatically charges overheads upon completion of each assembly in the operation.
On item records, you can select Standard Cost as a costing method for assembly items and inventory items. When an item uses standard costing, variances are generated based on differences between the fixed cost and the actual cost of the item. Since standard costs are usually slightly different from actual costs, the cost accountant periodically calculates variances that break out differences caused by such factors as labor rate changes and the cost of materials. The cost accountant may periodically change the standard costs to bring them into closer alignment with actual costs.