Difference between Standard cost and Average Cost in Sage 300

By | February 17, 2017

Inventory is one of the factors that you can control to improve your small business profitability. Inventory is the largest current asset for any business and proper measurement of inventory is important to assure financial statement of the business. Inventory levels can have a direct effect on a cash flow. The way you source and manage inventory can impact the different profit levels of your income statement.

There are different types of costing methods are present. The standard cost and Average cost plays important role in inventory costing.

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Average costing and standard costing are the costing method which helps in cash management. The purpose of both the cost are different, let’s check how both differ from each other

Standard Cost

Standard costing is mostly used to measure performance and cost control. Standard costing allows you to:

  • Value inventory at a predetermined cost
  • Determine profit margin based on projected cost.
  • Evaluate production costs relative to standard costs
  • Measure the organization’s performance based on predefined product costs

By adopting standard costing method, inventories and cost of goods sold will reflect the standard cost, not the actual cost of the product.

We can fix the standard cost to inventory item through IC Location form.

Inventory control >> IC Items and price list >> Location details

IC Location details

The user can add standard cost manually. Standard cost does not change unless you manually enter a new cost for the item.

Average Cost

Average costing is used primarily for distribution and other industries where the product cost fluctuates rapidly, or when dictated by regulation and other industry conventions. Average costing allows you to:

  • value inventory at a moving average cost
  • track inventory and manufacturing costs without the requirement of having predefined standards
  • determine profit margin based on an “actual” cost method
  • measure the organization’s performance against historical costs

The average cost method can also provide a steadier, reliable cost recognition structure than other methods, assuming costs do not swing wildly up and down for inventory items.

The average cost sometimes called the weighted average cost. The program assigns a unit cost to items that are withdrawn from a location’s inventory for sale or use. This unit cost is an average of all units in the location’s pool at that time.
Costs are updated during Day End Processing. You can check Average cost total in IC Location details

Inventory control >> IC Items and price list >> Location details

IC Location details avarage cost

The average cost cannot be overridden manually however it will be updated by any subsequent transactions. This is how both the costing is used in inventory costing.

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