Standard Costing: Standard costing method is used to measure the performance & cost control

of any organization.
1) Value inventory at predetermined cost.
2) Determines the Profit margin based on projected cost.
3) Record Variance against expected cost.
4) Evaluate production cost relative to standard costs.
5) Measures the organization performance based on predetermined product cost.
6) Evaluate Product cost to assist management decision.

Once you implement the standard costing method for an item, the standard cost processor
automatically creates accounting adjustments to update inventory value. The adjustment is
based on the valuation of on-hand quantity in inventory and calculated as follows.
Cost Adjustment = (New Std.Cost –Current Std.Cost)* On-Hind Quantity.
Average Costing: Average costing method is usually used in the Distribution and other
industries where cost of product fluctuates rapidly OR where industries dictated by regulations
or other Industry Conventions.
1) Value inventory at moving average cost.
2) Determines the Profit based on actual cost method.
3) Measures the Organization profit based on historical data.
4) Includes all direct costs of manufacturing an item in that item’s inventory cost.
5) Track Inventory and Manufacturing costs without the having requirement of
predefined standards.
The following table shows the functional differences between average and standard costing.
Standard Costing Average Costing
Material and Material overhead with inventory Material with inventory; All cost of elements
all cost elements with Bills of Material. with Bills of material.
Item cost held by cost sub-elements Item cost held by cost elements
Unlimited Sub-Elements Unlimited Sub-Elements.
Can Share cost across the organization when not No Shared cost; average cost is maintained in
using work in process organization separately.
Moving average cost is not maintained Maintains average unit cost with each
transaction.

Separate valuation accounts for each sub- Separate valuation accounts for each cost
inventory and cost element. elements.

Variance for work-in process transactions No-variances for work in process transactions.