Many accountants with whom I discuss seem to have only have book knowledge of costing and have often only been trained on, or had experience with, average costing. They then write the accounting standards so it becomes a loop. I say that because they say stupid thing like your get different profit margin with average and standard. However, profit is sell price - buy price so how you cost in between has no impact.
Costing has to satisfy many stakeholders- the tax man has a major say the costing method can affect the timing of profit - as do the auditors on behalf of shareholders-but that does not help the business to make decisions - the salesman who is quoting with average costs that were last updated a year ago find his actual margin on which his commission is paid bears no relation to his actual margin, or how does he decide based on his costs whether to take a large order at a much lower order at a lower price has different expectation of a costing system. (this ir elrevant for when was the BOM cost last rolled.).
A major factor in costing is how variable is the sale /purchase /manufacturing order quantity, and cost, and how long does it stay in inventory. The answer is probably different for every item and every company but auditors blindly insist on one method, because its what they understand.
From an accounting perspective if standard cost is not suitable then neither is average. They both require relatively stable costs, which also often means stable order sizes (IFRS if I remember correctly requires that they should be within 3% of each other). Average needs marking to take out the highs and lows. Averaging 49.9 with 50.1 makes sense averaging 40 with 60 does not. From my perspective, when these factors are not stable you get variances - the case in many companies, and I would prefer to be aware of those rather than just push them into inventory value. FIFO suffers from having to use average cost as an estimated cost until month end close.
In most companies some real world challenges are: that all inventory is not consumed in the same month - hence the need for inventory costing (as opposed to just bom costing), all orders and invoices related to receipts are not posted/closed before the month end close so there are adjustments the next month and those can be confusing when there is little inventory on which to post the adjustments. Those can be difficult to understand and are more complex to analyse than separately posted variances,
If costs are stable and inventory is largely consumed and accounted in the same month then any costing methods work ok in general you might as well use the one that you understand and that has the least performance hit. How many items and orders you have, and the complexity of your boms , how seasonal and erratic is demand, exchange rates etc may force a pragmatic decision of what is most workable.
Think of it this way if you expensed everything on receipt your purchase price is that same and you make a loss. when you sell you make 10)% profit on those materials so that offset the stock write off you just had a smaller profit initially and a larger one later.
Put the inventory into stock at sale price and you make an immediate profit and when you sell make none.
The other costing method are a compromise between those two extremes, Think about he business decisions you face with regard to inventory costs and that will help you decide.
