How do we create and update Standard Costs in NetSuite?

Before we begin creating and updating Standard Costs, first let’s review what it is.  Primarily Standard costing is used in manufacturing and procurement, to identify and substitute the expected standard cost for an actual cost that can fluctuate over time.  This mitigates the need for capturing extensive amounts of historical cost data.

It is important to ensure you have a plan for how you will update costs on a regular basis.  Most companies update it annually, but if your actual cost fluctuates significantly throughout the year, you may want to update them on a more frequent cadence.

Now that we understand Standard Costs a little better, let’s walk through the steps for setting it up.

  1. To use standard costing with inventory and assembly items, enable the Standard Costing feature.

To enable Standard Costing:

  1. Go to Setup > Company > Setup Tasks > Enable Features.
  2. Click the Items & Inventory subtab.
  3. Verify that the Inventory box is checked.
  4. Check the Standard Costing box.
  5. Click Save.
  1. Create Cost Categories.  Cost categories are used to classify the type of inventory item so that you can categorize manufacturing variances. For standard costing, set up cost categories and assign them a material or service cost type.

The Cost Category field is available only for these item types: Inventory, Non-inventory, Service, and Other Charges.

  • Inventory items can have only one material cost category.
  • Service items can have only one service cost category.
  • Assembly items can have more than one cost category because assembly costs are defined by the component members. The cost amount and cost category of each component member of an assembly is used to calculate the cost of the assembly. It also identifies the categories associated with it. This calculation process is called a cost rollup for assemblies.

When the Standard Cost feature is first enabled, NetSuite automatically creates one cost category. This category is used by default for all new inventory, assembly, and service item records you create. You can add more cost categories as needed.

To create a cost category:

  1. Go to Setup > Accounting > Setup Tasks > Accounting Lists > New.
  2. Click Cost Category.
  3. Enter a name for the category.
  4. In the Cost Type field, select one of the following:
    • Landed Enable the Landed Cost feature.
    • Material– For example, wood or metal.
    • Service– For example, painting or welding.
  5. In the Expense Account field, select the appropriate default expense account to be used as a clearing account for the landed cost of items. Then, when the item is sold, the cost of goods sold is accurately reflected.

The Expense Category field appears only on a cost category record when you select Landed in the Cost Type field. An expense account cannot be associated with a Material or Service type cost category. You do not have to associate a landed cost category with a Cost Of Goods Sold (COGS) account. The landed cost category account is intended as a holding account.

When landed cost is allocated, it posts to two accounts:

    • the asset account of the item
    • the landed cost category account

That posting is balanced out by a purchase line, either on the same bill or another purchase transaction, such as a shipping bill. The costing is accounted for in the COGS account of the item after the item is sold.

  1. Check the Inactive box only if you do not want this category to show in lists.

A cost category can only be inactivated if there are no items associated with that category.

  1. Click Save.

Now, you can select this cost category on item records and landed costs can be included on receiving transactions.

  1. Configure Item Records.

On item records, select standard cost as the costing method for assembly items and inventory items. When an item uses standard costing, variances are generated based on differences between the item fixed and actual costs. You can also select a standard costing method for lot or serial numbered items. For service items and inventory items, assign a cost category to help identify variances.

To set up an item record for standard costing:

  1. Go to Lists > Accounting > Items.
  2. Click Edit next to the item record.
  3. On the Purchasing/Inventory subtab, select the Standard costing method.

The costing method cannot be changed after the record is saved.

  1. Set the cost category.

Cost categories you have created appear in the list.

  1. Enter a cost in the Standard Cost field. You can enter a cost per location. The value in this field can be used as the default when you create a planned standard cost record.

To streamline data entry for setting up standard costs, you can also import values into this field using CSV import.

  1. In the Purchase Price Variance Account field, choose the account to post a variance to when a purchase transaction calculates a cost variance.
  2. In the Gain/Loss Account field, choose the account to post a variance to when an inventory transfer calculates a cost variance.
  3. On assembly item records, complete the following:
    1. In the Production Quantity Variance Account field, choose the account to post a variance to. The variance posts when the assembly cost is higher or lower than expected due to the number of items used in the assembly build.

For example, a variance is created if a build costs more because you use 10 widgets when you normally use 8.

    1. In the Production Price Variance Account field, choose the account to post a variance to. The variance posts when the assembly cost is higher or lower than expected due to the expense of items used in the assembly build.

For example, a variance is created if a build costs more because you use widgets that cost $30 each when you normally pay $20.

    1. In the Unbuild Variance Account field, choose the account to post a variance to when an unbuild transaction calculates a cost variance.

These fields appear only on assembly item records.

  1. Complete additional fields as necessary.
  2. Click Save.
  1. Define Cost Versions.

If you expect standard costs to change over time, or costs to vary based on location, you can establish multiple cost versions. For example, if costs change quarterly, you can establish four cost versions establishing standard costs for each quarter.

After you create cost category records and set up item records for standard costing, you must create standard cost version records for your items.

A standard cost version is a label to identify a time period or other identifying characteristic that you use to identify costs for items. Having various cost version records allow you to record the cost you expect to incur for an item at a particular time.

  • Knowing the expense you expect to pay for an item helps you to track cost variations. It gives you a point of comparison after you have a cost or bill for an item. For example, you record that you expect to pay $5 each for Item A this month. Later you get a vendor bill for Item A at $8 each. You know that your costs for that month are higher than you anticipated.

Creating standard cost version records helps you track these variances. Each cost version stores a standard cost to be used on different occasions. You can use multiple cost versions per item to track expected costs over time.

To define a cost version:

  1. Go to Lists > Accounting > Standard Cost Versions > New.
  2. Enter a name for this cost version. For example, enter Q1 2021.
  3. In the Location field, select one or more locations that this costing version is applicable to.
  4. In the Inventory Standard Cost field, select one of the following to define how the standard cost of inventory items is automatically calculated:
    • Average Cost– The average cost of the inventory
    • Item Default– The cost set in the Standard Cost field on the Inventory subtab on the item record. NetSuite generates planned standard cost records based on this field.
    • Last Purchase Price– The calculated last purchase price.
  5. Click Save.

After you create cost version records, you can set up a planned standard cost record for your cost versions. The planned standard cost is the record you use to specify the expected standard cost related to each cost version.

  1. Set up Standard Costs.

For each cost version, enter the standard cost for inventory items in a planned standard cost record. This record stores the expected cost of inventory items. This expected standard cost is used to calculate variances from the item cost.

  1. Roll up Standard Costs to calculate the total cost of assemblies.

The cost roll up calculates the total fixed cost of assembly and sub-assembly items based on data entered on the planned standard cost record. The planned standard cost record is sourced to find the cost of individual component items for assemblies. The cost of each member and sub-assembly is rolled up to calculate the total cost of the assembly.

The standard cost rollup helps maintain accurate costing data for assembly items by calculating the standard cost of assemblies. The cost of an assembly is determined based on current costs of member components.

The cost rollup process calculates the fixed cost based on data entered on the planned standard cost record. This allows the most accurate cost of each assembly component to be used in costing calculations.

In addition, cost calculations are performed for all parent component items. If an assembly has a component that is itself an assembly item, the same calculation is performed for the sub-assembly members. The cost calculations are performed down to the lowest sub-assembly level and then rolled up to find the cost of the parent assembly item.

  • A cost rollup is performed on an item only if that assembly has a cost category selected on the item record. Then, the calculated costs are broken out by components and cost categories.
  • The standard cost of all assemblies are calculated regardless of whether its components items use actual, average, or standard costing.

To run a cost rollup:

  1. Go to Lists > Accounting > Planned Standard Cost Rollup.
  2. Select one or more Standard Cost Versions. Click the icon to open a multi-select popup window.

A list of items corresponding to the cost versions shows.

  1. In the Effective Date field, enter the date you want the new standard cost to take effect.  This defaults to the current date.
  2. Check the Update Inventory Cost box to set the standard cost of all planned standard cost records of inventory items.

The planned standard cost records of inventory items are created or updated based on the inventory costing method defined on the cost version. When the default item record selection is used on the cost version, the cost rollup process reflects the cost in the Standard Cost field. This field is on the item record for each item selected. In addition, the planned standard cost of inventory items is automatically generated as part of the rollup process.

The next time you open this page, NetSuite checks or clears the box based on the previous use.

  1. The Rollup Assemblies Based on Components preference lets you select only the component. NetSuite creates inventory revaluation entries for all the higher-level assemblies. For example, you can introduce a new component for several existing assemblies, as follows:

Assembly A, Subassembly B, Component C (new)

Check the Rollup Assemblies Based on Components box and select component C on the page. When you submit, NetSuite finds all the associated assemblies within the entire bill of materials (BOM) tree. Then, creates inventory revaluation transactions for the component and for the assemblies (A,B,C).

  1. Check the Select box next to an item to include it in the cost rollup calculations. Clear the box next to an item to exclude it from calculations.

Check the All Items box to perform calculations for all items.

  1. Click Submit to perform the calculations.

NetSuite performs the cost rollup calculations and creates or updates the planned standard cost record for all items and sub-items. The list of these newly calculated planned standard cost records displays. Click View or Edit next to a planned standard cost records for details on that record.

  1. Revalue Inventory and update standard costs.

Revaluing inventory updates the standard cost of items and identifies the effective cost date.

Revaluation can be run using the following methods:

  • As a bulk process using existing cost version records.
  • Entering new costing data manually.

This process also runs an inventory revaluation which reviews your inventory and revalues it based on current standard cost changes.

To revalue standard cost inventory in bulk:

  1. Go to Lists > Accounting > Revalue Standard Cost Inventory.
  2. Select one or more Standard Cost Versions. Click the icon to open a multi-select popup window.

A list of items corresponding to the cost versions shows.

  1. Select or enter the effective date. This is the date after which the price on the planned standard cost record is used for costing calculations.
  2. Select an Adjustment Account. The inventory value variance amounts post to this account.
  3. Check the Revalue Assemblies based on Components box to revalue all affected assemblies based on the component selected.

Upon submitting this page, NetSuite remembers your selection for this box. The next time you open this page, NetSuite checks or clears the box based on the previous use.

  1. Check the box next to an item to include it in the cost rollup calculations. Clear the box next to an item to exclude it from calculations.

Check the All Items box to perform calculations for all items.

  1. Click Submit to perform the calculations.

NOTE:  After you submit the page, all marked items have their inventory value calculated. The prices on the planned standard cost record are used on transactions going forward.

That concludes the details of the standard way to set up Standard Costing Workflow. Every business is different, and you may have targeted questions about how this will best work for your company.  Citrin Cooperman has a team with vast knowledge about Standard Costs and we would be happy to help you and your company with any inquires. Please reach out to us at https://www.fmtconsultants.com/contact/ or give us a call for more information we look forward to hearing from. you.

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