About calculating standard cost
Many manufacturing companies select a valuation base of standard cost. This choice also applies to companies that do light manufacturing, such as assembly and kitting. A standard cost system determines inventory unit cost based on some reasonable historical or expected cost. Studies of past and estimated future cost data can provide the basis for standard costs. These costs are frozen until a decision is made to change them. The actual cost to produce a product can differ from the estimated standard costs. For management control, the actual cost is compared to the standard cost for a specific item and differences, or variances, are identified and analyzed.
Standard costs can be maintained for items that are replenished through purchase, assembly, and production. For each replenishment method, standard costs can consist of the following elements.
| Replenishment System | Standard Cost Elements |
|---|---|
| Purchase | Direct material cost and overhead material cost if it's required. |
| Assembly | Direct material cost, direct or fixed labor cost, and overhead cost. |
| Prod. Order | Direct material cost, labor cost, subcontractor cost, and overhead cost. |
Set up standard costs
Because the standard cost of a produced or assembled item can consist of multiple cost elements, including material, capacity (labor) and direct and overhead subcontractor costs, standard costs must be established for each of these elements.
The accounting task for an item-processing company using standard costing is to:
- Estimate a standard cost of the finished item and set it up on the item card.
- Record and allocate the actual cost of the key cost elements and to account for variances.
To determine the direct cost of a finished item, all component costs must be totaled. An assembled or produced item can include subassemblies, which also consist of multiple components.
The following key cost elements make up the total direct cost of a finished processed item:
- Material costs.
- Capacity cost.
- Subcontracting costs for produced items only.
Material costs
Material costs are costs that are associated with subassemblies and purchased raw material. Material unit cost can consist of direct and indirect cost elements.
- Direct material cost represents an invoiced amount for purchased raw materials or the processing cost of a subassembly.
- Indirect material cost, or overhead, can represent elements such as inventory carrying costs for the finished item after it's produced.
The setup of the material cost for purchased items that affect direct and indirect cost depends on the costing method that you have selected for the specified item. You set up cost information for either costing method on the item card. For more information, see Register New Items.
The cost of scrap (production only) is another factor to consider when you calculate the total material cost. When a certain amount of raw material is scrapped when you assemble or produce an item, it generally causes an increase in the quantity of components that are required to produce this item. This increases the material cost of the components that are consumed when producing a parent item. You set up scrap cost for materials on either the production BOM or routing.
The material cost of a produced item can be represented in two ways that correspond to the following cost calculation bases.
| Cost Calculation Basis | Material Cost Calculation |
|---|---|
| Single level | Produced item is equal to the total cost of all purchased or subassembled items on that item's production BOM. |
| Rolled-up level or multilevel | Produced item is the sum of the material cost for all subassemblies on that item's BOM and the cost of all purchased items on that item's production BOM. |
Capacity costs
Capacity costs are the costs that are associated with internal labor and machine costs. You must set up these costs for each resource (in assembly management) and work or machine center on the routing (in production). As with materials, you can identify both direct and indirect elements of capacity cost. For example, the direct cost for a work center can be the established shop rate to perform a specific function. The indirect cost for a work center can represent some general factory expenses, such as lighting, heating, and so on. As with material costs, you can express capacity overhead as an indirect cost percentage or a fixed overhead rate.
The setup of the capacity costs of assembled items consists of the following elements:
- Direct and indirect unit cost of the resource.
- Fixed or direct resource usage type.
The setup of the capacity costs of produced items consists of the following elements:
- Direct and indirect unit cost of the machine or work center.
- Time and lot size setup.
To calculate standard capacity cost, you have to establish the standard time rates that are required to perform operations on machine and work centers. The total time to complete an operation typically consists of setup, run time, and wait and move time.
You set up the rates for each time type for each machine or work center on an individual routing.
Note
While run time rates apply for each item unit that is produced, the setup time rates apply for each lot. Therefore, you must prorate the routing setup time for each operation over the lot size. You specify the lot size in the corresponding field on the Replenishment FastTab of the Item Card page.
To specify setup time on the routing for planning but not include this expense in the standard cost calculation, clear the Cost Incl. Setup field on the Manufacturing Setup page.
On a single-level basis, this is the labor cost that is required to produce the finished production item and is specified on the production item's routing. On a multi-level basis, this is the capacity cost that is specified for each individually produced item that is included in the parent item's BOM.
Subcontractor costs
Subcontractor costs are the costs that are associated with services that are provided by a company's outside vendors or subcontractors. Similar to material and capacity, subcontractor costs can consist of both direct and overhead amounts. Direct subcontractor cost represents the actual charge for each unit of services that is provided. For example, overhead subcontractor cost can represent freight and handling costs that the company incurs with a subcontracted order.
Because subcontracting is an outsourced capacity, you set up the cost of both direct and indirect subcontracting services on the work center card that represents the subcontracting operation.
Populate standard cost
You can set standard cost manually or you can calculate the item's standard cost from the Item card page. Choose the Production group, then choose the Calc. Production Std Cost action to update cost of production items or choose the Assembly group, then choose the Calc. Assembly Std. Cost action to update cost of assembly item. The actions will consolidate and roll up the component and capacity costs to calculate the total assembly or manufacturing cost of the items.
To calculate the unit cost of an assembly or production BOM, the parent item and its component items must use the Standard costing method. Any resources in the BOM are rolled up if they have a unit cost that is defined on the item, resource. workcenter card. Not cost defined on stockkeeping unit (SKU).
If you have open entries, after implementing the changes to Standard Cost field on the item card, remember to perform inventory revaluation. For more information, see Revalue Inventory.
Updating standard costs with Standard Cost Worksheet
The Standard Cost Worksheet is intended as a tool for purchasers, production or assembly managers, and internal controllers when they have to review and update standard costs.
The Standard Cost Worksheet window makes it possible to perform the following:
- Prepare the changes in advance of the date when they have to take effect.
- Simulate the effect on the cost of the manufactured or assembled item if the standard cost for consumption, production capacity usage, or assembly resource usage is changed.
- Execute the changes at a given date and let them take effect immediately.
The purchaser uses the Suggest Item Standard Cost batch job to update and work with the costs of purchased items in one worksheet. When the result is satisfactory, the worksheet is given to the internal controller.
The production or assembly manager uses the Suggest Work/Mach Ctr Std Cost batch job to update and work with the production capacity costs and assembly resource costs of processed items in another worksheet. This worksheet is also given to the internal controller.
The internal controller then uses the Copy Standard Cost Worksheet batch job to consolidate the worksheets into one worksheet. The controller uses the Roll Up Standard Cost batch job to make a roll-up of the costs from the purchaser and the production/assembly manager. The roll-up determines the standard costs of manufactured and assembled items. The controller also previews cost changes before and after the roll-up to identify unacceptable deviations. When the updates are acceptable, the internal controller implements the changes to take effect on a given date.
The Implement Standard Cost Change batch job is used to implement the standard cost changes, which updates the standard costs on the item cards of the items that are included in the worksheet. It also creates revaluation journal lines so that you can update the items in stock with the new standard cost.
To update standard costs
- Run the Adjust Cost-Item Entries batch job. To start the batch job, choose the
icon, enter Adjust Cost-Item Entries, and then choose the related link. Hover over a field to read a short description. Review the results and make changes as necessary. - Run the Post Inventory Cost to G/L batch job. To start the batch job, choose the icon, enter Post Inventory Cost to G/L, and then choose the related link. Hover over a field to read a short description. Review the results and make changes as necessary.
- Choose the icon, enter Standard Cost Worksheet, and then use one or more of the following actions:
- Run the Suggest Item Standard Cost batch job.
- Review the results and make changes as necessary.
- Run the Suggest Capacity Standard Cost batch job.
- Review the results and make changes as necessary.
- Run the Roll Up Standard Cost batch job.
- Review the results and make changes as necessary.
- Run the Implement Standard Cost Changes batch job.
- Review and post the Revaluation Journal page, which has been populated with entries from the previous steps in this process.
Suggest Item Standard Cost
Creates suggestions for changing the costs and cost shares of standard costs on item cards. When the batch job has completed, you can see the result in the Standard Cost Worksheet page.
Note
This batch job is intended for purchased items only. If you want to update an item with a production BOM or assembly BOM, then you must first fill in the worksheet with all the components and then run the Roll Up Standard Cost batch job.
This batch job only creates suggestions. It doesn't implement the suggested changes. If you're satisfied with the suggestions and want to implement them, then select Implement Standard Cost Changes in the Standard Cost Worksheet page.
Options
Standard Cost: Enter the adjustment factor you want to use to update the standard cost. You can also select a rounding method for the new standard cost. You have to fill in the field using a decimal for the percentage increase, for example 1.1.
Indirect Cost %: Enter the adjustment factor you want to use to update the indirect cost %. You can also select a rounding method for the new indirect cost %. You have to fill in the field using a decimal for the percentage increase, for example 1.1.
Overhead Rate: Enter the adjustment factor you want to use to update the overhead rate. You can also select a rounding method for the new overhead rate. You have to fill in the field using a decimal for the percentage increase, for example 1.1.
Suggest Work/Mach Ctr Std Cost
Creates suggestions for changing the costs and cost shares of standard costs on work center, machine center, or resource cards. When the batch job has completed, you can see the result in the Standard Cost Worksheet page.
This batch job only creates suggestions. It doesn't implement the suggested changes. If you're satisfied with the suggestions and want to implement them, then select Implement Standard Cost Changes in the Standard Cost Worksheet page.
When you have run the batch job and want to see the impact on your production or assembly departments, then you run the Roll Up Standard Cost batch job to update standard costs on work centers, machine centers, assembly resources, production BOMs, and assembly BOMs.
Options
Standard Cost: Enter the adjustment factor you want to use to update the standard cost. You can also select a rounding method for the new standard cost. You have to fill in the field using a decimal for the percentage increase, for example 1.1.
Indirect Cost %: Enter the adjustment factor you want to use to update the indirect cost %. You can also select a rounding method for the new indirect cost %. You have to fill in the field using a decimal for the percentage increase, for example 1.1.
Overhead Rate: Enter the adjustment factor you want to use to update the overhead rate. You can also select a rounding method for the new overhead rate. You have to fill in the field using a decimal for the percentage increase, for example 1.1.
Copy Standard Cost Worksheet
Copies standard cost worksheets from several sources into the Standard Cost Worksheet page.
You can only copy one worksheet at a time. The lines from the copied worksheets will be placed below each other in the consolidated worksheet. Item lines are listed first, then work/machine center lines are listed, and resource lines are listed last.
Roll up standard cost
Rolls up the standard costs of assembled and manufactured items. These are influenced by the change in standard costs of components suggested by the Suggest Item Standard Cost batch job. In addition, they're influenced by the change in standard cost of production capacity and assembly resources suggested by the Suggest Work/Mach Ctr Std Cost batch job.
Once you have run either or both of these batch jobs and you do the roll-up, then all changes to the standard costs in the worksheet are introduced in the associated production or assembly BOMs, and the costs are applied at each BOM level.
Note
This function only rolls up the standard cost on the item cards, not on the SKU cards.
This batch job only creates suggestions. It doesn't implement the suggested changes. If you're satisfied with the suggestions and want to implement them, then you can use the Implement Standard Cost Change batch job.
Options
Calculation Date: Enter the date that applies to the production BOM version you want to do the roll-up for.
Implement standard cost change
Updates the changes in the standard cost in the Item table with the ones in the Standard Cost Worksheet page. The standard cost change suggestions can be created with the Suggest Item Standard Cost and/or the Suggest Work/Mach Ctr Std Cost batch job, and they can also be modified. The contents of all the fields in the standard cost change suggestions are transferred. When you implement suggestions of changes to standard costs, you can see them on the item card and/or on the work/machine center cards. A revaluation journal is also created for you to update the value of existing stock.
Options
Posting Date: Enter the date that the revaluation should take place.
Document No.: Enter the number of the revaluation journal lines. If there's a number series set up on the item journal batch name, the document number follows the ledger entries made by the posting of the revaluation journal. Otherwise, you can manually enter a number.
Item Journal Template: Enter the name of the revaluation journal template.
Item Journal Batch Name: Enter the name of the actual revaluation journal
Select OK to start the batch job. If you don't want to run the batch job now, select Cancel to close the window.
Review and post the Revaluation Journal page, which has been populated with entries from the previous steps in this process.
See also
Design Details: Costing Methods
Design Details: Inventory Costing
Work with Assembly BOMs
Create Production BOMs
Work with Bills of Material