Standard v/s AVG Costing

You can have different cost method for each inventory org. 
Be careful that Oracle does not support changing cost method once items are enabled

you can enable standard costing in master and average cost in inventory orgs. So transactions occur at avg cost. But this will enable you compare or do various analysis if needed with reports using standard cost in master.

Standard Costing	Average Costing
Material and material overhead with Inventory; all cost elements with Bills of Material	Material with Inventory; all cost elements with Bills of Material
Item costs held by cost sub-element	Item costs held by cost element
Unlimited sub-elements	Unlimited sub-elements
Can share costs across organizations.  The master cost organization can be the only organization using WIP.	No shared costs; average cost is maintained separately in each organization
Moving average cost is not maintained	Maintains the average unit cost with each transaction
Separate valuation accounts for each subinventory and cost element	Separate valuation accounts for each cost element (see note below)
Variances for WIP transactions	No variances for WIP transactions

*The average unit cost is maintained at the organization level.  If you had separate valuation accounts by subinventory, total inventories would balance, but account balances by subinventory would not match the inventory valuation reports.

STANDARD COSTING

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Accounting principles require inventory to be valued at actual cost. To make things easy, standard costs are often set to approximate actual costs and have inefficiencies built in. Variances to standard are then capitalized and amortized over estimated inventory turns. Alternatively standard costs are built to measure performance efficiency and set performance targets. It provides the ability to measure performance.

Standard costing is mostly applicable for process manufacturing & industries.

Standard costing is opted If the cost of raw material for manufacturing the finished good is going to be consistent for a given period of time say during a financial year and there are not many fluctuations are expected in their cost

In this scenario, standard costs are established and the actual performance is measured against those standards by way of variance analysis. 

Standard costing has a lot of ideal quantitative parameters like BOM, process time, process wastage, machine and labour hours consumed, batch sizes etc.

At the end of month we only need to adjust the differences by variance Analysis.

You must have a great database to develop great variance analysis reports.

Without an ERP/MRP, variance analysis using standard costing is very challenging, specially where there are several processes and items cannot be standardized.

Operations team could vary the batch sizes due to other parameters like production optimisation, raw material flow issues, machine down time etc. As a result the variances between standard costing and actual costing could consistently vary either +/- making the variance analysis a mere number crunching exercise. Unless the operations are standardised taking into account all operational issues, standard costing may not work. 

In setting standards, you are creating benchmark for operations, where you have starting point for understanding variances, thus, good for cost control. You have to fine-tune your standards to reflect what is practical and achievable. Preparing budgets, identifying BEP and analyzing cost-volume-profit analysis will be handy with standard costing.

Standard costing has a lot of advantages especially in the manufacturing process where the company can use the STD COST as a type of good internal competitivity between Manufacturing X Commercial área. according to the improvents in the production operation, Manufacturing is engaged to reduce costs and improve processes to help increasing the margins and adding value to the company. The main challenge is the discussion of the level of standard costs, what needs to be consider Market price, competitiveness and several other points.

As in any system the goal is to determine what cost assumptions I made up front have changed, for whatever reason, and what levers can I pull to address, either with the customer, supplier or my own process. The goal is always to measure against the plan and the plan is always standard cost unless you are working in a Cost Plus contract environment.

If you not measuring your standard variances on a monthly 
basis then having standards set up is a waste of time both to engineering and  accounting. Standard costing is easy to manage but, needs to dive deeply into more analytical procedures at incrption & on regular basis to monitor the mood of production cycle.

The std cost process finalized to obtain a fine set of reports is an important goal that you have to pursue. But this is the first step to pull more and more your firm to an efficiency process. Many times (not always, unfortunately) std cost represents a way to evaluate the real cost of your production, through which the management could decide to define the sales price. In this way, the sales price could be properly fixed or not. I would be more calm, working on sales price, if i knew that the assembly process is efficient. Std cost, infact, could drive (in a right or wrong way) the process of Sales Price definition

standard costing and variance analysis can be applied not only for material cost but also for labour & overheads. If your company has done a work study of the jobs involved and arrived at a standard labour hour for assembling valves of different types you can calculate the standard cost of labour per valve (standard hours required to complete one assembly x standard labour hour rate). Please note that you can build in normal process idle time so that the standard hour is set properly. In order to do this you need to break down the entire assembly activity into sub-activities for calculate std hour for an efficient and a not so efficient employ. You may then take a weighted average if you have a mix of efficient and not so efficient employees (ignore extremes on either side). After the standard labour cost is worked out, you can do variance analysis for labour cost as usual.

using the resulting labor efficiency for one of your KPI's. This is achieved by calculating what your labor hours 'should' have come in at based on quantity produced x std labor cost and dividing by your actual direct labor hours. This can be done at designated departments or sub-component level. This enable you to keep a close eye on performance throughout the process as well as highlight when efficiencies have improved to the point where your standards needs to be adjusted. 

I've found the most efficient method for the finance department is using standard cost. I've set up cost reserves to capitalize any variances as a separate account from the valuation at standard. This enables a quick reconciliation of accounts and using standards provides the ability to measure performance. This is very efficient for the finance department but can be a challenge in times of extreme cost fluctuations since may "canned" reports will used your chosen valuation method to determine product margins. Knowing your current product costs is critical for capturing true margins for many decision making exercises.

The capitalization of variances (all variances, not just overhead) can be done locally or at corporate. In a very large organization, it makes sense to capitalize at corporate since many variances will offset by the time they reach the top. On the consolidated P&L, the capitalized variances are taken to P&L over the turn of the inventory to be GAAP compliant.

Lately I've used direct cost. All labor and overhead costs are calculated on the balance sheet as two lines: Variable Costs in Inventory or Period Costs in Inventory and are recalculated and updated every quarter. It's clean, easy and GAAP compliant. Standard costs are only updated once a year unless there is a significant cost change event.

STANDARD COSTING does not work where always.

Unless the operations are standardized taking into account all operational issues, standard costing may not work.

Price variations happen all the time in all industries but within a range. Where the fluctuations are beyond the normal economic theories, standard costing could fail.

AVERAGE COSTING

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Average costs can not be shared across inventory organizations.

But average costing is typically for purchasing environment, and don't allow you to maintain cost in detail by cost elements. Average costing does not book any variances

If you know that the cost of raw material is fluctuating and there is no consistency in it, it is suggested to go for average costing method.

You need not recognize PPV (purchase price Variance )

Weighted Average is an option is you revaluate your inventories every month or quarter and your purchases are been acquired for several vendors and the price is different for each of them. 

BUT *****

but if you are in a business that is experiencing a lot of fluctuations in raw materials you can get stung very quickly using average costing. Also, it limits your ability to give your sales group accurate current cost information for bidding/quoting purposes. 

WHEN parts prices vary frequently Average costing  keeps our costs 'current' - No need to do massive Standard Cost updates to items (we have 100k items so that would be a ton of work!!) 

DISADVANTAGES

 Use of 'generic' part numbers for purchasing can make costs charged to a sale be very different from PO price when different items are ordered using the same part number and they have widely different prices

The key drawback to average costing is that it is just a 'Mathematical Exercise' and hence do not provide you help with any analysis. Also, if you are a bulk purchaser and your purchases are few and far between, the mathematical average will be significantly different from the 'Current Cost'. Another disadvantage is that it is a 'Post Facto' costing and hence not much help for any pre-emptive analysis. 

Misc receipt without putting proper cost could really mess up your average cost quickly. 

If your org allows negative, be careful on how it affects average cost calculation.

Only downside we have with Average is that you cannot have multiple accounts (ie - material, overhead) for different subinventories. Same accounts for all.

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We are in process of converting a Standard Cost Org to Average. We are essentially: 
1) Renaming the original Org (ie XX-) 
2) Copy Org to new 
3) Update scripts for Costing Method and Subinventory Accounts (because once you copy you can't change Costing Method 
By all accounts, it seems to be testing out fine. We did run into some issues with invalid accounts on items, but that was purely a data issue on our part.