Hi all
We are a manufacturing company that currently uses Standard Cost for components, Standard Cost for Finish Items ( Batch production), and Actual Cost for Bespoke Finish Items.
The problem we are having is regarding the Cost of Sales. We have been told by our external auditors that we should use FIFO instead of Standard for 3 main reasons:
- Easy to apply and utilize immediately as costs are recorded at actual cost
- Valuation of inventory based on the age of the inventory that is held.
- Easy to understand and see the inventory costs sold at the point of sale.
Although, the manufacturing Senior Management is against mainly because of Bom costing.
To give a straightforward exemple.
Standard Cost
Product A
Unit Cost = 1£
Duty, Freight, Insurance, etc per unit = £0.10
Standard Cost = £1.10
Fifo
Product A
Unit Cost = 1£
When costing the BOM it would not recognize other costs. To make it harder, we have price breaks when purchasing and we always want to cost our Boms taking into consideration the worst-case scenario.
I would like to get some insights from the community about the best cost method approach.
