What is Standard Costing?
A method that values inventory and production at predetermined expected costs, then analyses the differences as variances.
Definition
Standard costing assigns a fixed, predetermined cost to each material, labour operation, and overhead element, representing what an item should cost under normal conditions. Actual costs are then compared to these standards, and the differences are recorded as variances such as material price, material usage, labour rate, and overhead variances. Analysing variances helps managers see whether costs are running above or below expectation and why, supporting cost control and pricing. Standards are typically reviewed and reset periodically, often annually, to reflect changing prices and processes.
How Standard Costing Works in ERP
An ERP stores standard costs against each item and routing, values inventory and cost of goods sold at standard, and automatically calculates variances as actual purchases and production deviate from standard. Procurement triggers purchase price variances, and production orders generate usage and efficiency variances posted to dedicated GL accounts. Finance reviews these variances each period and runs a cost roll-up to refresh standards when needed.
ERP Vendors with Strong Standard Costing
Frequently Asked Questions
What is a cost variance and why does it matter?
A cost variance is the difference between the standard (expected) cost and the actual cost incurred. A favourable variance means actual cost was lower than standard, while an unfavourable one means it was higher. Variances pinpoint where prices, usage, or efficiency drifted from plan so managers can investigate and act. ERPs calculate and categorise these variances automatically, making them a routine part of the cost-control review.
How often should standard costs be updated?
Most companies refresh standard costs at least annually, often during budgeting, and sometimes more frequently when input prices are volatile. Updating too rarely lets standards drift far from reality, producing large variances that obscure real performance. Updating too often defeats the purpose of having a stable benchmark. ERPs support periodic cost roll-ups so finance can revalue inventory to new standards in a controlled way.