Standard
and Average Costing Compared
Cost
Management offers two perpetual costing methods: standard costing and average
costing.
Average
costing is used primarily for distribution and other industries where the
product cost fluctuates rapidly, or when dictated by regulation and other
industry conventions. Average costing eliminates the need to set standards.
Average costing allows you to:
value
inventory at a moving weighted average cost
track
inventory and manufacturing costs without the requirement of having predefined
standards
determine
profit margin based on an actual cost method
measure
the organization's performance against historical costs
include
all direct costs of manufacturing an item in that item's inventory cost
Standard
costing is used for performance measurement and cost control. Standard costing
allows you to:
value
inventory at a predetermined cost
determine
profit margin based on projected costs
record
variances against expected costs
update
standard costs from any cost type
evaluate
production costs relative to standard costs
measure
the organization's performance based on predefined product costs
evaluate
product costs to assist management decisions
The
following table shows the functional differences between average and standard
costing.
Average Costing Standard Costing
Material
with Inventory; all cost elements with Bills of Material Material and material overhead with
Inventory; all cost elements with Bills of Material
Item
costs held by cost element Item costs
held by cost subelement
Unlimited
subelements Unlimited subelements
No
shared costs; average cost is maintained separately in each organization Can share costs across child organizations
when not using Work in Process
Maintains
the average unit cost with each transaction
Moving average cost is not maintained
Separate
valuation accounts for each cost group and cost element Separate valuation accounts for each
subinventory and cost element
Little
or No variances for Work in Process Transactions Variances for Work in Process
transactions
Table 1
- 1. Comparison of Standard and Average Costing
Under
average costing, you cannot share costs. Average costs are maintained
separately in each organization.
Under
standard costing if you use Inventory without Work in Process, you can define
your item costs in the organization that controls your costs and share those
costs across organizations. If you share standard costs across multiple
organizations, all reports, inquiries, and processes use those costs. You are
not required to enter duplicate costs. See: Defining Organization Parameters
and Defining Costing Information.
Note:
The organization that controls your costs can be a manufacturing organization
that uses Work in Process or Bills of Material.
Organizations
that share costs with the organization that controls your costs cannot use
Bills of Material.
Valuation
Accounts and Cost Elements with Average Costing
The
system maintains the average unit cost at the organization level; it does not
use any subinventory valuation accounts. If you had separate valuation accounts
by subinventory, total inventories would balance, but account balances by
subinventory would not match the inventory valuation reports.
Note:
Cost Management enforces the same account number for organization level
material and intransit accounts. Otherwise the balances of inventory valuation
reports do not equal the sum of accounting transactions.
Work in
Process: Elemental Visibility
You can
assign different accounts to each cost element when you define a WIP accounting
class. This provides maximum elemental account visibility. In average costing,
elemental account visibility is automatically maintained. In standard costing,
you can choose to summarize accounts or maintain elemental visibility. See Work
in Process: Account Summarization and Implementing Profile Options Summary.
Changing
from Standard to Average Costing
You
cannot change the costing method of an organization once transactions have been
performed. See: Defining Organization Parameters and Defining Costing
Information.
