T here are three ways in which a standard costing system is typically used in a manufacturing company:

1. Performance measurement
2. Decision making
3. Inventory valuation

From an accounting perspective, performance measurement and decision making are part of a company’s management accounting system, which is the internal information used by management to measure, manage, control operations, and also to make business decisions.

Inventory valuation, on the other hand, is part of financial accounting. Companies must comply with accounting principles related to inventory valuation for financial reporting.

What's the problem?

A primary weakness of a standard costing system is that all of the information created and used is based on some combination of product cost information and production reporting information. In general this information comes from bills of material and in routings, as well as standard rates for material, labor, and overhead. An enterprise resource planning (ERP) system typically does the mathematical calculations and creates different types of variances, absorption numbers, and the actual inventory valuation.

 …