Standard Costing

Standard costing is a technique used particularly in manufacturing industries whereby a cost is calculated for each manufactured item to include parts, labour, and even the costs of the machinery needed to produce it. The selling prices placed on such items may be based on the calculation of the standard costs.

The advantages of this approach are twofold. Firstly, a cost of sales figure can immediately be ascribed to sales made in any period because each product has a standard cost attached to it which takes account of manufacturing costs. Secondly, management time can be spent in checking on, and trying to reduce, the actual costs versus the calculated standard costs — which can only improve profitability.

Whilst this may seem more relevant to the accounting system, particularly the nominal ledger, the stock system is an important ingredient. Materials and parts are purchased into work in progress (WIP) stores.Wages and machinery costs (tooling, repairs, and depreciation) used for making things are also ascribed to WIP.As goods are made, they are taken from WIP at the standard cost to put into finished goods stores for shipment to customers.

In a Datafile Software system WIP and finished goods stores can be set up as two separate locations.You can define assemblies to describe how goods are made, so that usage of parts from WIP stores into finished goods is controlled. You can even include non-stock items to account for labour and machining costs.This would allow the computer system to help you in your standard costing calculations, and even ensure that finished goods items have up-to-date standard costs.

When you fulfil sales orders through the Datafile Software order processing or invoicing systems, the stock system makes sure the standard cost goes along with the stock and sales transactions to give you cost of sales figures. The stock system gives you the valuation of final goods stock at the end of each period, and also the stock component of work in progress.

The nominal ledger now values work in progress from WIP stock plus labour and machinery costs expended each period, less the value of items transferred to finished goods at the standard cost prices (one of the stock system transaction reports).