Cost Management offers many perpetual costing methods, including standard costing and average costing.
Average costing is used primarily for distribution and other industries where the product cost fluctuates rapidly, or when dictated by regulation and other industry conventions. Average costing eliminates the need to set standards. Average costing allows you to:
Value inventory at a moving weighted average cost
Track inventory and manufacturing costs without the requirement of having predefined standards
Determine profit margin based on an actual cost method
Measure the organization's performance against historical costs
Include all direct costs of manufacturing an item in that item's inventory cost
Standard costing is used for performance measurement and cost control. Standard costing allows you to:
Value inventory at a predetermined cost
Determine profit margin based on projected costs
Record variances against expected costs
Update standard costs from any cost type
Evaluate production costs relative to standard costs
Measure the organization's performance based on predefined product costs
Evaluate product costs to assist management decisions
The following table shows the functional differences between average and standard costing.
| Average Costing | Standard Costing |
|---|---|
| Material with Inventory; all cost elements with Bills of Material | Material and material overhead with Inventory; all cost elements with Bills of Material |
| Item costs held by cost element | Item costs held by cost subelement |
| Unlimited subelements | Unlimited subelements |
| No shared costs; average cost is maintained separately in each organization | Can share costs across child organizations when not using Work in Process |
| Maintains the average unit cost with each transaction | Moving average cost is not maintained |
| Separate valuation accounts for each cost group and cost element | Separate valuation accounts for each subinventory and cost element |
| Little or No variances for Work in Process Transactions | Variances for Work in Process transactions |
Under average costing, you cannot share costs. Average costs are maintained separately in each organization.
Under standard costing, if you use Inventory without Work in Process, then you can define your item costs in the organization that controls your costs and share those costs across organizations. If you share standard costs across multiple organizations, then all reports, inquiries, and processes use those costs. You are not required to enter duplicate costs. See: Defining Costing Information.
Note: The organization that controls your costs can be a manufacturing organization that uses Work in Process or Bills of Material.
Organizations that share costs with the organization that controls your costs cannot use Bills of Material.
The system maintains the average unit cost at the organization level; it does not use any subinventory valuation accounts. If you had separate valuation accounts by subinventory, then total inventories would balance, but account balances by subinventory would not match the inventory valuation reports.
Note: In Average Costing, depending on the FOB point, the elemental valuation accounts defined are used for either the cost group or the transfer cost group as the intransit accounts. Otherwise, the balances of inventory valuation reports do not equal the sum of accounting transactions.
You can assign different accounts to each cost element when you define a WIP accounting class. This provides maximum elemental account visibility. In average costing and standard costing, elemental account visibility is automatically maintained.
You cannot change the costing method of an organization once transactions have been performed.
Defining Organization Parameters and Defining Costing Information.