One of the most commonly asked questions we receive from our customers when rolling out a Microsoft Dynamics GP Distribution and/or Manufacturing implementation is which costing method is best. Dynamics GP supports both actual (FIFO/LIFO perpetual) and standard (FIFO/LIFO periodic) costing methods.
Standard (FIFO/LIFO Periodic) costing is the best method for a business that only needs to revalue its inventory periodically to reflect significant changes in the standard cost of inventory items. The idea with standard cost accounting is that a fixed cost is established for all inventory items and that fixed cost is used until the company makes a change or revalues the item.
Standard cost is very useful in a quick turn, low finished inventory shop. It’s the simplest method of costing in that items do not have to be received from shipping or manufacturing to be shipped and invoiced. Standard costing does not have to update the cost of items during inventory receiving transactions. Instead, the variances are posted immediately to Purchase Price Variance (PPV). Any other variances found during the invoice match process from the supplier will also be posted to these variance accounts.
Standard cost is sometimes referred to as periodic cost. Meaning, the cost of items are locked in place for a period of time. Operation Managers can look at an item’s cost and anticipate that the item can be built or purchased at the standard cost, and make a reasonable quote to a potential customer.
The precision of standard costs is often a concern for any company carrying inventory. If the standard is established at one cost and the actual costs dramatically increase, the company can start to lose a tad bit of money on each use of the item. If actual costs decrease, then a company could lose business if a competitor is able to quote a lower price. A cost accountant should regularly analyze the variance accounts to determine if a new standard should be established. Variance cost accounting drives some people nuts. However careful and thorough analysis of variances makes it easy to spot costing trends, problems or other issues that need to be addressed. Other costing methods could simply bury these flags (aka variances) in the adjusted cost of the items.
Standard costs should not be recalculated frequently. Most companies that choose to use the standard costing method typically revalue their costs annually or semi-annually. If a company is revaluing costs more often, such as quarterly, it would suggest that the firm should not be using the standard costing method and should consider the actual costing method.
In Actual (FIFO/LIFO Perpetual) costing, the actual cost for items can change very commonly, in some cases daily. This frequent cost change and the up and down direction is the influence for determining whether actual costs should be used instead of standard. For instance, a company having relatively stable production volumes from month to month will have few problems with actual costing. Actual costing updates the cost of items during the inventory receiving transactions, and may seem more complicated than standard, but it is necessary in some cases.
Let us help you determine which costing method is best for you, or reevaluate your costing method today to ensure that you are staying competitive!
Whaley, Richard L., Product Engineering for MS Dynamics GP Manufacturing