The standard cost represents the expected or typical expense associated with acquiring or manufacturing a product in usual conditions. Essentially, it signifies the regular expenditure a business typically incurs when generating goods or services.
The advantage of employing standard costing lies in its ability to enable a company to meticulously oversee its expenditures through the establishment of cost standards. This, in turn, facilitates improved cost management, evaluation of performance.
Business Scenario:
Let's examine a business scenario in which a company procures materials initially based on expected costs. Upon receiving the actual materials and determining their exact costs, the company then adjusts these costs to account for any variances.
To meet this need, the business intends to implement the Standard Costing method. Now, let's delve into how General Ledger entries and Value entries are recorded in this context.
Create Item with Standard Costing Method
When we initiate the creation of a new item and opt for the STANDARD costing method, the Standard Cost field becomes editable. Within this field, we are required to input the standard cost for the item. Failure to specify a cost here will result in the actual cost being posted as a Variance when a purchase invoice is posted.
Let's examine this process in depth by considering a real-world scenario.
"The Unit Cost field is automatically adjusted and synchronized to match the Standard Cost."Purchase 1: Purchase Price would be same as Standard Cost
Purchase Price 20, Standard Cost 20
GL Entries will be same as FIFO costing method blog
Item ledger entries and Value entries will be identical under the FIFO method since both prices are the same, resulting in no discrepancies.
Purchase 2: Purchase Price would be higher than Standard Cost
Purchase Price 30, Standard Cost 20
Before proceeding with the posting, please ensure that one critical step is taken care of: in the General Ledger Setup, make sure to select the Purchase Variance Account.
In the GL entries, you will notice additional entries generated for Purchase Variance and Inventory.
In the item ledger entries, the actual cost is recorded as 2000 based on the standard cost, and in the Value entries, a variance of -1000 is posted.
Purchase 3: Purchase Price would be lower than Standard Cost
Purchase Price 15, Standard Cost 20
In the item ledger entries, the actual cost is recorded as 10000 based on the standard cost, while in the Value entries, a variance of 2500 is posted.
"If the price exceeds the standard cost, the Variance is posted as a negative amount; however, if the price is lower than the standard cost, the variance is posted as a positive amount."
How to check Cost Variance?
In Business Central, there is a Standard report named as Inventory - Cost Variance, when you run this report you can see item wise Purchase Cost and Standard Cost, there differences and net total Variance.
Sales Invoice 1: Posting Sales Invoice with Selling Price 50 Qty. 300
GL entries will be same as standard. COGS Amount calculated based on Standard Cost. There is no Variance calculated at the time of posting.
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