Standard costing is a widely used cost accounting method that is employed by businesses to determine their expected costs of production. It is a tool for companies to estimate their future expenses and pricing strategies accurately. In this article, we will discuss the definition of standard costing, how to calculate it in Viindoo software, and its benefits.
What is Standard Costing?
Standard costing is an accounting method that helps businesses estimate their costs by establishing predetermined standards for direct materials, direct labor, and overhead. These standards are set based on historical data, market trends, and other factors that may affect the cost of producing goods or services.
With standard costing, businesses can determine if they're making a profit or a loss on each product or service they offer. By comparing actual costs with standard costs, businesses can identify areas where they may be able to reduce expenses and improve efficiency and profitability.
For example, you set the standard price for product A: 1200đ per unit. You purchase 10 units of product A at 1000đ per unit and then later purchase 10 more units at 1500đ per unit, the standard cost would be calculated as follows:
Inventory value = Quantity on hand x Standard price.
How Does Standard Costing Work?
The Standard Costing method determines standard values for cost elements in the production or service provision process. Here is how the standard value is determined in this method:
- Determine the standard value for raw materials: The standard value for raw materials includes the purchase price and related costs such as transportation and handling. To determine standard values, businesses can use information sources such as price lists from suppliers, price negotiation processes or historical price data.
- Determine the standard value for labor work: The standard value for labor work includes average salary, benefits and labor-related costs such as social insurance, taxes and training fees. These values may be based on the business's historical data or other sources of information such as reports of average salaries in similar industries.
- Determine standard values for other factors: In addition to raw materials and labor, standard values can also be determined for other factors such as energy, machinery and equipment, and management costs. management and other factors related to the production or service provision process. These standard values can be based on historical data, supplier data, or other estimation methods.
After determining the standard values for cost elements, these values are applied to the specific product or service to calculate the standard value for each unit of product or service. This process often involves applying specific formulas or rules determined by the standard cost method.
Note that determining standard values is a process of evaluation and estimation, and it may change over time. To ensure the accuracy and reliability of standard values, businesses need to update and review these values periodically based on the latest information and changing factors in the business environment.
Advantages of Standard Costing
Standard costing offers several advantages to businesses, including:
- Increased accuracy: By using standard costs, businesses can estimate their costs more accurately, helping them make better decisions about pricing and profitability.
- Improved cost control: Standard costing helps businesses identify areas where they may be able to reduce costs and improve efficiency.
- Better decision-making: Standard costing provides businesses with a clear understanding of their costs and profitability, allowing them to make informed decisions about investments, pricing, and other business strategies.
Limitations of Standard Costing
While standard costing offers several advantages, it also has some limitations, including:
- Time-consuming: Setting standards for each product or service can be time-consuming, requiring significant effort from accounting and production teams.
- Inflexibility: Once standards are established, they may be difficult to change, making it challenging to adapt to changes in the market or production processes.
- Not suitable for all businesses: Standard costing may not be suitable for businesses that produce unique products or services, with irregular production costs or require highly skilled labor.
How to Calculate Standard Costing in Viindoo Software
In Viindoo, standard inventory costing refers to the process of valuing your inventory based on predetermined standard costs rather than the actual costs incurred. To set up and calculate standard inventory costing in Viindoo, you'll need to follow these steps:
>>>> See More: Accounting for Stock Valuation
Tired of manual standard cost calculation? Automate it now!
- Automate the cost calculation for inventory items.
- Ensure accuracy and consistency in cost accounting
- Receive real-time updates on cost changes and inventory valuation
- Enhance financial decision-making with precise and up-to-date cost data
Step 1: Configuration of Product Categories
Log in to your Viindoo account and go to the Inventory app.
Create or edit the product categories, you apply the standard method to.
Configuration Standard Costing Method on Product Categories Viindoo
Step 2: Configuration of Products
For product form, configure the General Information tab as follows:
- Product Type: Storable Product;
- Product Category: All/Saleable.
- You need to add the price manually on each product.
Configuration Standard Costing Method on Product Viindoo
Step 3: Make Sales or Deliveries:
When you make a sale or deliver products, Viindoo will automatically calculate the cost of goods sold (COGS) using the Standard costing method.
Create sale order products with the Standard costing method Viindoo
Step 4: Monitor Inventory Valuation
You can monitor the Inventory valuation by generating reports.
Go to Reporting > Inventory > Inventory Valuation.
View Inventory Valuation reports - Stand Costing Method
The value of outgoing and incoming inventories calculated at standard prices is not affected by the cost price.
When there is a price change, you must also update the price accordingly.
Inventory value = Quantity on hand x Standard price.
Inventory valuation with Standard costing method Viindoo
FAQs
What is standard costing in Viindoo software?
Standard costing in Viindoo software is a method used to determine the expected or standard cost of a product or service. It involves setting predetermined costs for various inputs such as raw materials, labor, and overheads. These predetermined costs are used as a benchmark against which the actual costs can be compared and analyzed for variances.
How is the standard cost calculated in Viindoo software?
The standard cost in Viindoo software is typically calculated by taking into account the expected costs of the different components that make up a product or service. This includes the cost of raw materials, direct labor, and overheads. The calculations are based on the predetermined standards set for each component, which can be updated periodically to reflect changes in costs or other factors.
How often should businesses update their standard costs?
Businesses should update their standard costs periodically, typically on an annual basis. However, if there are significant changes in market conditions, raw material costs, or production processes, standard costs may need to be adjusted more frequently.
Can standard costing be used for services as well as products?
Yes, standard costing can be used for services as well as products. The process is similar; however, instead of calculating the cost of raw materials, you'll estimate the cost of labor and any other expenses associated with providing the service.
Does Viindoo support multiple standard cost methods?
Yes, Viindoo software supports multiple standard cost methods. You can choose the appropriate method that suits your business needs and configure the system accordingly. Common standard cost methods include weighted average cost, FIFO (First-In, First-Out), and specific identification. Viindoo allows you to define the costing method at the product level and apply it to the relevant transactions and calculations
Tired of manual standard cost calculation? Automate it now!
- Automate the cost calculation for inventory items.
- Ensure accuracy and consistency in cost accounting
- Receive real-time updates on cost changes and inventory valuation
- Enhance financial decision-making with precise and up-to-date cost data
Conclusion
Standard costing is an essential tool for businesses looking to manage their costs and improve profitability. By establishing predefined standards for direct materials, direct labor, and overhead, businesses can estimate the cost of producing each product or service they offer. Viindoo software makes calculating standard costs easy by automating the process and taking into account all the necessary variables. With Viindoo, businesses can make informed decisions about pricing, investments, and other strategies based on accurate and up-to-date information.
>>>> See More:
- How to Use Specific Identification Methods for Inventory Valuation in Viindoo Software
- How to use the average costing method on Viindoo software
