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Submitted by Dave Weismann on 26 May 2021

Why Manufacturers Prefer To Use The Standard Costing Method

For manufacturers, selecting a costing method is one of the most important decisions you will need to make because it has an impact on your costs, budgets, and profits. If those aren’t reason enough to make a well-informed decision, keep in mind that changing costing methods mid-stream is going to cause complications because it impacts your financials, reporting, and taxes. 

There are many methods to choose from, and while it might seem that you should strive for the most sophisticated method, that is not necessarily the right answer. There is no “best” costing method for everyone; the method you choose should be what is best for how your company does business and your strategic goals. 

However, most manufacturers choose the Standard Costing method. This blog post discusses that costing method and why it’s preferred by manufacturers.

What Is A Costing Method?

A costing method is simply a structure within your ERP system tracking  inventory, costs, and profitability. Read about the most common costing methods here. By doing so, you are in a better position to maximize profits and avoid unnecessary cash flow. To determine the right costing method, you must first determine how you want to value your inventory and how you will record cost of goods sold to monitor performance. The most common method is Standard.

Standard Costing: Why Manufacturers Choose It

The Standard Costing method is typically recommended for manufacturers. It measures the costs incurred against standard values and provides variance analysis to monitor performance. Instead of using historical information to value inventory, it sets predetermined costs, so any differences between standard costs and actual costs appear as variances, which are noted so they can be further analyzed. 

Manufacturers prefer this method for two reasons: 1) with a bill of materials and a routing, you can quickly build out standard costs; and 2) it is helpful in identifying opportunities to optimize inventory by providing feedback via variances. 

The challenge with this method, however, is that it can be difficult to put into place and requires more overhead (in the form of employees, including a cost accountant). In addition, you need to determine how often standards should be set and ensure continuous analysis to get much-needed variances—which often means tracking and posting actual costs daily. 

With Standard Costing, you need to ask if the return on your investment of time and resources is worth it. Is someone actively reviewing variances or operational variances at the production order or item level, looking for trends, and using the information to make improvements? If not, then perhaps another costing method is best for your company. 

You’ll often find that manufacturers with stable, well-established processes and inventory levels tend to use Standard Costing more often than others. Nevertheless, it is an excellent choice because it can provide the best control of costs as well as financial stability. 

You Get Out Of It What You Put Into It

There are many other costing methods available, all of which have pros and cons and are “best” depending on how your business operates. However, like anything, what you get from your costing method depends on what you put into it. Regardless of which costing method you use, don’t strive for 100 percent accuracy if you can’t ensure that same level of inventory accuracy. And you won’t get benefits from your costing method if you don’t put effort into capturing costs correctly and in a timely manner. Further, you will not get value if you don’t use data you gather (in the form of variances or other) to make positive changes. 

Talk To The Manufacturing Experts 

As with any important business decision, it’s important to be well informed before committing. ArcherPoint’s team of manufacturing experts understand the details and complexities of costing and more and can help you determine the best path for your company—as well as how to ensure your ERP is equipped to support it. In the end, we can ensure you have a system and solution that will deliver cost control and financial stability. Get in touch with ArcherPoint today to start the conversation and determine which costing method makes the most sense for your manufacturing business.