The Difference Between Standard and Accounting Standard Cost

The total standard cost for an item (generated by Product Costing) and total accounting standard cost (used by Inventory Accounting) are identical at the moment when the accounting cost generation is run.  Although the totals are the same, the detailed components of the total cost are grouped differently.

Within Product Costing, an item's total cost is divided into the total material cost, the total labor cost, and the total overhead cost.  The material cost includes only the cost of purchased parts and raw material.  It is determined from the bill of material.  The labor and overhead costs contain all labor and overhead required to produce the item and all of its manufactured components.  These costs are determined from the routing.  This method of organizing material, labor, and overhead costs allows Product Costing to simulate changes in raw material costs or labor/overhead rates easily.

Within Inventory Accounting, the item's total cost is also divided into material, labor, and overhead components.  However, the material cost of the item contains the total cost of each of its immediate components.  (The total component cost includes the raw material of the component plus the labor and overhead required to manufacture that component).  The labor and overhead components of the parent item contain only the labor and overhead required at this level to produce the end item from its immediate components.  This approach for organizing cost detail in Inventory Accounting simplifies the task of generating journal entries and variances for specific manufacturing orders (since an individual manufacturing order is created for each level in the bill of material). 

The following diagram illustrates the difference in how cost detail is grouped within Product Costing and Inventory Accounting. 

Cost Detail Grouping in Product Costing and Inventory Accounting