As we know, the Costing Method field on the Item Card, once the inventory has been posted, can no longer be changed.
Given that the Italian version of BC provides for a valuation of inventory parallel to the international one, which allows us to make the choice of the costing method (called Inventory Valuation ) whenever we want, the incorrect setting of the Costing Method field has an implication that is best not to underestimate, especially when talking about production.
In these companies, when we have to import the items, it is advisable (but clearly not mandatory, see the conclusions) to set the Costing method field to the Standard value for all items that require production (finished and semi-finished products) and to set the same field to the method chosen by our customer for all raw materials.
Why? Let's take look at this example.
I created an item with the following structure and costs:
Both item A and B are valued at standard cost and their value is 13 and 8 Euros, respectively.
I then produced A by inserting additional material consumption plus some production inefficiencies (extra run time minutes than expected). For example, on the following production order, I have the following situation:
Its statistics tell me that I had additional costs for 20 Euros. Ok, but at what value the inventory has been posted? Let's look at the value entries associated with the order above:
Note how the system has kept the output values separate from those due to the two production inefficiencies. The load is made at standard cost (13 euros), calculated as the sum of the actual cost (1320), subtracted from the two inefficiencies (20 euros), marked as Variance by the Entry Type field.
By launching the Inventory Valuation report, it is noted that the system does not take into account any variances, either in the increases or in the dereases (COGS): both are made at a value of 13 euros.
So, what happens with the Standard Costing Method is that all the production inefficiencies do not contribute to the value of my inventory at the end of the year. Had we chosen a different method, the production output would have been done at actual cost, therefore including the 20 euros of inefficiency in a single entry.
This explains the reason for choosing the Standard cost for the items to be produced.
It is clear that the situation reverses if instead of inefficiencies I have greater efficiencies than expected (I used less time). My efficiency would not contribute to decreasing the value of my inventory. Of course, this scenario is less likely than the first.
The Italian valorization method
It is perhaps worth clarifying the impact that this approach may have on the final valuation of stocks with the Italian fiscal valuation.
This, as anticipated above, is determined by the Inventory Valuation field and possibly the LIFO Category field of the item card.
By launching the Italian cost calculation procedure and subsequently the inventory valuation report, we obtain the valuation of the stocks carried out with a method other than the Standard one (note the higher value).
Since the Italian valuation does not include the Standard as a calculation criteria, if you want to use this method, you will obviously have to rely on the Inventory Valuation report instead of the Italian one.
Conclusions
We have therefore understood that selecting the Standard cost on the Costing Method allows us on the one hand not to bring inefficiencies to the value of the inventory, and in any case, even in the case in which the fiscal valorization occurs with a different method, it allows us to highlight at any time what the inefficiencies themselves have been and where they have occurred, thus allowing us to have greater control of our production system.
I will return to the issue of the Standard costing method in other posts, trying to clarify when to choose it, when perhaps not, and the connections with the relevant fiscal laws.
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