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Standard costing vs FIFO costing method

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Posted on by Peter Toh

In the manufacturing environment, can we use all direct purchases as FIFO costing and the in-house processes as Standard costing?

Their pros and cons of selecting all standard costing vs all FIFO costing method.

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Inge M. Bruvik 1,105 Moderator on at

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Yes you can and i think that is a solution that many companies chose.

What really should determine your choice is how you calculate the cost of the products that you manufacture.

Running all FIFO means that you will have to make sure you have all your cost covered as part of the manufacturing process. And that effort might not pay off if you have a good method of doing your standard cost calculation.

To me FIFO for direct purchase and Standard for manufacture goods sounds like a good startingpoint.

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Dallefeld 211 User Group Leader on at

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Inge is correct and will work.

There is a movement by many companies in today's marketplace to stop using standard cost. When asked why they are using standard cost, most companies are using standard cost to understand PPV (purchase price variance). PPV can easily be obtained from the value entries via a report (Power BI, Jet or something else.)

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Community Member on at

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Agree with the prior responses. I would add that using FIFO for purchases and Standard for produced items can get tricky when trying to roll up the standard costs. If you do this often, you could get differing standard costs since the cost for the purchased items could change frequently in an environment where purchase prices change frequently.

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Dallefeld 211 User Group Leader on at

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Good Point David....

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Peter Toh 21 on at

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Thank you for the advice. Like to know any other challenges for choosing FIFO both Standard purchases and manufacturing processes.

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Peter Toh 21 on at

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Agreed with you David. At the same time the produced items could also vary as well when being monitoring the actual performance vs Standard plan cost (Routing planned).

Like to know any other challenges if both purchased and processed are set FIFO method?

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Guy McKenzie 1,336 on at

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Standard cost has the advantage that you can measure discrete variances I.e. at specific operations or for specific materials.

FIFO will just return a finished cost.
if that cost has a significant variance from your anticipated cost, tracking down the source of the variance is far harder to do.

If you have significant variances with standard costs, it is important to recognise that they are measured with the functional area and do not get rolled up into your sales margin.

Also, with standard cost, you can measure sales margin based on the sales function success rather than the sales function achieving or losing margin through no actions/fault of their own.

It really does depend on what drives your variances, how large they are and where you want to drive margin analysis as to whether Standard is worth the effort.

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Dallefeld 211 User Group Leader on at

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All good points Guy!

What I see with clients is that they are not using the analysis pieces provided by standard cost and spend time updating standards too often so they are not getting the benefits.

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Guy McKenzie 1,336 on at

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Agreed completely Kim.

People often buy into an idea without appreciating the practical implications.

One area where we found it useful was with purchased raw materials that were global commodities. We found it far better to build manufactured costs based on a standard material cost that we controlled rather than a volatile market price.

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