About Standard Cost

Cost Elements

 

1. Material

• The raw material/component cost at the lowest level of the bill of material determined from the unit cost of the component item.

 

2. Material Overhead

• The overhead cost of material, calculated as a percentage of the total cost, or as a fixed charge per item, lot, or activity. You can use material overhead for any costs attributed to direct material costs. If you use Work in Process, you can also apply material overhead at the assembly level using a variety of allocation charge methods.

 

3. Resource

• Direct costs, such as people (labor), machines, space, or miscellaneous charges, required to manufacture products. Resources can be calculated as the standard resource rate times the standard units on the routing, per operation, or as a fixed charge per item or lot passing through an operation.

 

4. Overhead

• The overhead cost of resource and outside processing, calculated as a percentage of the resource or outside processing cost, as a fixed amount per resource unit, or as a fixed charge per item or lot passing through an operation. Overhead is used as a means to allocate department costs or activities. For example, you can define multiple overhead subelements to cover both fixed and variable overhead, each with its own rate. You can assign multiple overhead subelements to a single department, and vice versa.

 

5. Outside Processing

This is the cost of outside processing purchased from a supplier. Outside processing may be a fixed charge per item or lot processed, a fixed amount per outside processing resource unit, or the standard resource rate times the standard units on the routing operation. To implement outside processing costs, you must define a routing operation, and use an outside processing resource.

 

 

Costs Incurred, Costs Relieved, Variances Relieved and Net Activity

 

 

Costs Incurred : Costs associated with material issues/returns, resource, and overhead transactions of a job or repetitive schedule. This can be computed as:

 

                      Cost Incurred = Issued Quantity * Component/Unit Cost

 

Costs Relieved : Standard costs relieved by cost element when assemblies from a job or repetitive schedule are completed or scrapped. This can be computed as:

 

Relieved Cost = Material Cost (based on completion date) * Completed quantity

 

Variances Relieved: Variances relieved by cost element when a job or accounting period is closed, or when a repetitive schedule is cancelled. This can be computed as:

 

Variances Relieved = Cost Incurred - Cost Relieved

 

Note: This is After Closing of Work Order

 

Net Activity: Cost element net activity, the difference between the costs incurred and the costs and variances relieved. This can be computed as:

 

Net Activity = Cost Incurred - Cost Relieved

 

                      Note: This is Before Closing of Work Order

 

 

Standard Cost Valuation

• Inventory and Work in Process continually update inventory value with each transaction. Work in Process balances is updated with each related accounting transaction. Inventory subinventory values may be reported when the quantity movement occurs.

 

Value by Cost Element

• Inventory or work in process value is maintained and reported on by distinct cost element (such as material, material overhead, and so on), even if you assign the same general ledger valuation account to each cost element. You can also report work in process value by cost element within specific WIP accounting classes.

 

Standard Costing

• Under standard costing, the value of inventory is determined using the material and material overhead standard costs of each inventory item. If you use Bills of Material, Inventory maintains the standard cost by cost element (material, material overhead, resource, outside processing, and overhead).

 

Unlimited Cost Types

You can define an unlimited number of cost types and use them with any inventory valuation and margin analysis reports. This allows you to see the potential effects of a cost rollup/update. You can also update your standard costs from any of the cost types you have defined. When you use Bills of Material with Inventory, you can specify the cost type in explosion reports and report these costs for simulation purposes.

 

 

Standard Cost Variances

 

1. Standard Cost Inventory Variances

• In general, Inventory records purchase price variance (PPV) and recognize cycle count and physical inventory adjustments as variances.

 

Purchase Price Variance (PPV)

•  
  • During a purchase order receipt, Inventory calculates purchase price variance. In general, this is the difference between what you pay the supplier and the item’s standard cost. Inventory calculates this value as follows:

PPV = (PO unit price – standard unit cost) x quantity received

•  
  • Inventory updates the purchase price variance account with the PPV value. If the purchase order price is in a foreign currency, Inventory converts it into the functional currency of the inventory organization and calculates the purchase price variance. Purchasing reports PPV using the Purchase Price Variance Report. You distribute this variance to the general ledger when you perform the general ledger transfer, or period close.

 

Invoice Price Variance (IPV)

•  
  • In general, invoice price variance is the difference between the purchase price and the invoice price paid for a purchase order receipt. Purchasing reports invoice variance. Upon invoice approval, Payables automatically records Invoice Price Variance, to both invoice price variance and exchange rate variance accounts.

 

Cycle Count and Physical Inventory

•  
  • Inventory considers cycle count and physical inventory adjustments as variance. You distribute these variances to the general ledger when you perform the general ledger transfer or period close.

 

 

1. Manufacturing Standard Cost Variances

·         Work in Process provides usage, efficiency, and standard cost adjustment variances.

 

Usage and Efficiency Variances

o       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.

o       Usage and efficiency variances are primarily quantity variances. 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. Efficiency variance can also include rate variance as well as quantity variance if you charged resources or outside processing at actual.

 

Material Usage Variance

o       The material usage variance is the difference between the actual material issued and the standard material required to build a given assembly, calculated as follows:

standard material cost x (quantity issued – quantity required)

o       This variance occurs when you over or under issue components or use an alternate bill.

 

Resource and Outside Processing Efficiency Variance

o The resource and outside processing efficiency variances is the difference between the resources and outside processing charges incurred and the standard resource and outside processing charges required to build a given assembly, calculated as follows:

(applied resource units x standard or actual rate) – (standard resource units at standard resource rate)

o       This variance occurs when you use an alternate routing, add new operations to a standard routing during production, assign costed resources to No – direct charge operations skipped by shop floor moves, overcharge or undercharge a resource, or charge a resource at actual.

 

Move Based Overhead Efficiency Variance

o       Move based overhead efficiency variance is the difference between overhead charges incurred for move based overheads (overhead basis of Item or Lot) and standard move based overheads required to build a given assembly, calculated as follows:

applied move based overheads – standard move based overheads

o This variance occurs when you use an alternate routing, add operations to a standard routing during production, or do not complete all the move transactions associated with the assembly quantity being built.

 

Resource Based Overhead Efficiency Variance

o       Resource based overhead efficiency variance is the difference between overhead charges incurred for resource based overheads (overhead basis of Resource units or Resource value) and standard resource based overheads required to build a given assembly, calculated as follows:

applied resource based overheads – standard resource based

overheads

o This variance occurs when you use an alternate routing, add new

operations to a standard routing during production, assign costed resources to No – direct charge operations skipped by shop floor moves, overcharge or undercharge a resource, or charge a resource at actual.

 

Standard Cost Adjustment Variance

o Standard cost adjustment variance is the difference between costs at the previous standards and costs at the new standards created by cost update transactions.