How can you avoid risks when using standard costing?

2 Update your standards regularly

Another risk of using standard costing is that it may become outdated or irrelevant over time, as your production processes, technology, and market conditions change. If you use old or unrealistic standards, you may not capture the true costs of your inventory and you may overstate or understate your profits and losses. To avoid this, you should update your standards regularly and reflect any changes in your cost drivers, such as material prices, labor rates, or overhead allocation. You should also review your standards periodically and compare them with the industry benchmarks and best practices.

4 Consider alternative methods

Standard costing is not the only method of inventory valuation available to you. Depending on your business context, objectives, and needs, you may want to consider alternative methods that may suit your situation better. For example, you may use actual costing, which records the actual costs of each unit of product, rather than using estimates or averages. This can provide more accurate and detailed information, but it can also be more complex and costly to implement and maintain. Alternatively, you may use activity-based costing, which assigns costs to each activity or process involved in producing a product, rather than using a single overhead rate. This can provide more relevant and reliable information, but it can also require more data and analysis.

5 Implement internal controls

Finally, to avoid the risks of using standard costing, you should implement internal controls that ensure the quality, integrity, and security of your inventory information. Internal controls are policies, procedures, and systems that prevent, detect, and correct any errors, fraud, or mismanagement that may affect your inventory valuation and reporting. Some examples of internal controls are segregation of duties, authorization and approval, reconciliation and verification, documentation and record-keeping, and auditing and monitoring. By implementing internal controls, you can reduce the likelihood and impact of any mistakes or irregularities that may compromise your inventory management.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?