Standard Cost on the Income Statement

May 2, 2019
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Hi all, ERP admin here and accounting is not my core strength, so please bear with me if this is a simple question.

A company I work for manufactures and sells finished goods using standard costing on an average cost basis. Direct costs such as labour, fuel costs, etc are included in standard cost.

Raw materials are received into inventory, get debited from inventory to work orders and then get credited back in as finished goods, which include standard cost. On the balance sheet, finished goods have two accounts, one which includes only material cost and another for standard additional expense.

On the income statement, COGS includes material cost with standard additional expense. However, costs like, fuel and labour also appear on expense accounts.

Should be some adjustment in COGS standard additional expense or in expense accounts to make up for this difference, so we aren't double counting, or is there something I'm misunderstanding?



John Baker

The methods and terminology used in manufacturing varies greatly with the kind of manufacturing and the purpose of costing/valuation.
If your company manufactures a propriety product, build over and over again in the thousands of this and that, then it's practical to employ a standard costing method of valuation because-
> you have contracts, or other stipulations, that allows purchasing to be somewhat stable both in quantity and price
>you have repetitive machine functions, repetitive labor functions that are not subject to change
>you have an occupancy that is stable and draws the same support for utilities, related occupancy taxes, and similar demands

Industries that constantly face change in technologies, like electronics, custom fabrication and so forth, are not well suited for a static costing system/method such as standard costing.

Now to address your situation. Your description is somewhat confusing on the one hand, but not without comments on the other.
I say this because many companies mix the methods of valuation for certain inputs, and classify them as such, because of the nature
and temperament of the manufacturing process. So, let me try and associate my experience, the best I can, with what I think is happening at your company and why. Please keep in mind I'm trying to read into your comments the best I can.

Raw material is purchased and stocked, at an AVERAGE floating cost. So as long as quantities and price per unit of measure aren't
extreme, this method is easy to apply and can actually represent the actual cost of material throughout the manufacturing process.

You mentioned other costs are stated at STANDARD , which tells me that labor and other associated direct costs, are fairly repetitive
in nature and can be measure with time study methods, meter readings and monthly billing, and so forth. The direct labor is stated on
a factory routing sheet which spells out the labor type/grade, the rate of output - either governed by manual operation or some sort
of machine rate system.

So from what I gather, I assume that your labor is far more controllable than your material input. Thus the two methods of valuation.

Now with respect to double charging, there are some costs that won't into the flow of value through the shop. Some overhead, both
labor and occupancy can be "expensed". These items will never be a shelf value but will be charged off in the COGS schedule, but
classified differently.

Caution using AVERAGE costing for manufacturing. If not properly applied, the on going job orders through the plant can change up and down, thus distorting the "costs in time of application."

I'm not sure if I addressed your question. Is there something that I can address specifically?

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