Standard pricing in your inventory producing means two things – the prices need to be accurate and up-to-date. It’s not just having the right price but ensuring the price reflects actual costs made for producing this certain item. If the inputs change often, you need to identify the goods affected and test the standard against the actual quite often.

However, on bigger picture, standard pricing is aside continuous testing against actuals just another way to expense your inventory. If the inputs rarely change, it’s a pretty solid method however. 

So how does it work? In essence, the easiest method would be initially just account all expenses made on the income statement and as you put items into stock, that is when they are finished, you take their standard price off the expenses and put into stock. Essentially:

1. You make expenses worth of a 1,000 (materials, labour, depreciation, overheads etc.) and charge it to the income statement (Db Expenses, Cr Liabilities)
2. With the expenses made you produce 20 items with standard price of 45, making this a total of 900.
3. Those goods are now taken on as your stock so your next accounting entry is Db Inventory 900 and Cr Expenses 900.
4. The remaining 100 in your expenses is an indication that your standard price may not be accurate anymore. If you know the cause and it is indeed one off situation, there’s no reason to change the standard price, however, do make sure you consider the possibility of a change being needed.

And that’s in a nutshell how standard costing works. If you had only used half of the expenses for finished stock, only half is put into inventory as finished. If some of the materials in the middle of the production at period end, they’re recognized, as work-in-progress and as such, portion of the expenses should be charged to inventory instead. Work-in-progress is something we’ll focus on later on in more detail.