[ASK] Pro and Cons of having Direct material use Moving Average while Production cost use Standard Costing

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Dear All,

My current company planning to use standard costing for their Production cost but they still want to use Moving average for their direct material. Please kindly share the information of pro and cons of having direct material use Moving Average while the Production cost use Standard Costing.

Thank you in advance.

Regards,

Grace

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Ludwig Reinhard Microsoft Employee on at

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Hello Grace, I have seen a similar setup where raw materials used in production were subject to 'erratic' market price fluctuations and one tried to 'smooth' those fluctuations in order to avoid large production variances. The raw materials used were for the same reason not setup with standard costs to avoid large purchase variances. What about your scenario? What kind of raw materials do you use in production? How much do they contribute to the total costs of the produced items? Ludwig

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Hello Ludwig, thanks for your reply. My scenario is the market price for direct material is pretty fix. The contribution of total costs is about 30%. There's concern that our finance not keen to use moving average for their direct material as the difference will all go to material usage variance. It's also not represent the actual consumption for production.

From IT view, we're fine with their option but the concern is the conversion process from moving average to standard costing. I've read the white paper from Microsoft about that conversion process and thought there must be lots of effort to do that and we don't have any experience doing that. Perhaps you could share some of your experience.

Thanks again.

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Ludwig Reinhard Microsoft Employee on at

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Hello Acquamarine,

If the market price for your direct materials is pretty fix, it should not make a big difference whether you moving average, weighted average or any other inventory valuation method for your direct materials as the variance postings for the moving average model will be small anyway. Rather than using moving average costing for direct materials I would personally chose standard costs or a weighted average valuation method. That is not because of the variances that the moving average costing method creates but rather because of the difficulties of correcting wrong moving average postings. As an example, some month ago, a user made a mistake with the units and prices when posting a vendor invoice. Instead of posting 500 pcs with a price of 10000$/100 pcs she posted 50000 pcs (simply added two zeros ad the end...). Correcting this wrong entry and making sure the inventory valuation is corrected again is much harder with the moving average pricing model compared to all other inventory valuation models. Maybe this is another aspect you can consider when deciding about the valuation method to be used.

All the best,

Ludwig

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