What is the purpose of standard price?

[Former Member]

Hi,

I wonder why do we need to use standard cost estimate to release the standard price for finished goods because why cant we use the price calculated in the cost object controlling. For example :-

Standard price created by product cost planning :- $3

Actual costs collected by the production order = $100 (Total debits)

Lot size = 5 units

If we were to use the standard price to do the credits to inventory then the price of material will be calculated as follows :-

5 X 3 = $15

However if we use this calculation instead where the total costs is divided by the units then we get 100 / 5 = $20 which will reflect the true price of the product. Hence my question is why cant we use this latter method to compute the actual price of the product and update the material standard price accordingly instead of doing product cost planning?

Please clarify this.

[Former Member · Accepted solution]

You would want to update the standard price based on the actual cost on one production order?

So if you have one order that generated a lot of waste and produced one unit of the finished material at 50% above (old) standard cost you would change the standard price and thus revalue the possible 10.000 units you have in stock at 50%, generating a gain of possibly millions of $ in your PL?

This is just an example of why this may not be a good idea under all circumstances. I'm not saying there are no scenarios where it may make sense.

The material ledger for example gives you the possibility to set your actual unit cost of the last period as the new standard price for the next period, which comes close to your approach.

In most scenarios though you don't know the actual cost of your production order until at least the end of the period. And then you will usually have more than one order with different unit costs.

[Former Member · Accepted solution]

Hi,

If you are saying the reason why we dont use the actual price for standard price is to account for production wastes, then if we use material ledger to compute the actual price then how will it solve the problem of wastes in the production process?

[Former Member · Accepted solution]

It was an example to show why in most scenarios using actual cost from just one order to set a new standard price that is used to value ALL stock would not be a very good idea.

The material ledger works based on periods and thus you get actual costs (and a new standard price) that are based on a much larger number of production orders, therefore reflecting an average over the period which is not as much subject to unsystematic ups and downs as the unit cost of a single production order.

If you had a separate valuation per production batch, using actual costs from each order and then valuing that batch at its actual cost would make sense.

[Former Member · Accepted solution]

Thats a wonderful answer, i like it. thanks!!

[Former Member]

HI,

the purpose is to COMPARE planned cost (=S-price from product cost planning) to actual cost (cost collected on production roder) and post the variances to CO-PA where you get planned cost +- deviation = actual cost.

My question is: why does your plan not reflect 5 EUR per unit if this is the "true price" as you explained, maybe your plan data needs to be checked...

best regards, Christian

[Former Member]

Hi,

Ok but what is the benefit of comparing both the prices? What will go wrong if we just use the actual price as the standard price in this case?

[Former Member]

HI,

plan data is used for capacity planning, demand planning,... So if your plan data is wrong you are not able to control your business (as planned capacity is too high/low, raw material demand is wrong, both thinsg lead to unnecessary real cost without value-add).

You can use just actual figures but without planning you dont know why you are missing your targets (if you have some)...

Best regards, Christian

[Former Member]

Nikolas answer is more appropriate. Anyway thanks to you too.