How to Set Up Standard Costing in NetSuite for Accurate Production Tracking

Key Takeaways

• Standard costing provides automated variance analysis unavailable with average or FIFO costing methods
• Implementation costs for simple projects range from $30,000-$50,000, while standard implementations typically cost $60,000-$100,000 or more depending on complexity
• Organizations find that standard costing simplifies the month-end close process and reduces manual cost analysis workload
• Multi-Location Inventory must be enabled before activating standard costing
• Lack of cross-departmental alignment between accounting, procurement, and production is a common pitfall that leads to implementation failures

Understanding the Fundamentals of Standard Costing in NetSuite

Standard costing replaces fluctuating inventory costs with predetermined values that remain fixed regardless of actual purchase prices or production expenses. When transactions occur, NetSuite automatically calculates differences between standard and actual costs, posting variances to designated GL accounts.

What Is Standard Costing and Why Does It Matter for Manufacturers?

Unlike average costing—which constantly adjusts based on purchase prices—standard costing establishes benchmark costs for materials, labor, and overhead. This creates a baseline for performance measurement. When your procurement team buys materials above standard cost, the system immediately flags this as a purchase price variance.

For manufacturers running complex operations with work orders and assemblies, standard costing provides critical benefits:

• Predictable margins for pricing decisions and quotes
• Performance benchmarking against budgeted production costs
• Real-time variance alerts when costs exceed acceptable thresholds
• Simplified budgeting using fixed cost assumptions
• Audit trail for cost changes and variance posting

Key Benefits Over Other Costing Methods

The fundamental difference between standard and average costing lies in variance visibility. Average costing adjusts inventory values silently—you see margin changes but not root causes. Standard costing surfaces every deviation as a trackable variance entry.

Consider this scenario: Material costs increase 15% from a supplier. With average costing, your gross margin simply drops. With standard costing, a purchase price variance immediately appears in your GL, allowing procurement to investigate before month-end surprises.

Initial NetSuite Configuration: Setting the Stage for Standard Costs

Proper NetSuite implementation starts with feature enablement and prerequisite verification. Skipping these steps leads to configuration errors that plague operations for months.

Enabling Standard Costing in NetSuite Preferences

Before enabling standard costing, verify these prerequisites:

1. Multi-Location Inventory must be enabled
2. Transfer Order preference "Use Item Cost as Transfer Cost" must be DISABLED
3. Chart of Accounts must include variance GL accounts

To enable the feature, navigate to the Setup menu and look for Company preferences, then Enable Features. Under the Items & Inventory section, look for the Standard Costing checkbox and save your changes.

Once enabled, a default cost category is auto-created, and "Standard" appears as a costing method option on item records.

Configuring Item Records for Standard Costing

Each item requiring standard costing needs individual configuration. Navigate to your Items list, edit the item record, and complete these settings:

Purchasing/Inventory Subtab:

• Select Standard as Costing Method
• Assign Cost Category (Direct Materials, Labor, Overhead)
• Enter Standard Cost per location

Accounting Tab Variance Accounts:

• Purchase Price Variance Account
• Gain/Loss Account (inventory transfers)
• Production Price Variance Account
• Production Quantity Variance Account
• Unbuild Variance Account

For comprehensive inventory management setup, establish cost categories before configuring individual items. This ensures consistent classification across your item master.

Defining Your Standard Cost Components and Procedures

Standard cost accuracy depends on properly structured cost components. Most manufacturers use five cost categories: Direct Materials, Material Overhead, Direct Labor, Manufacturing Overhead, and Landed Cost.

Breaking Down Production Costs into Standard Components

Create cost categories by navigating to the Setup menu and looking for Accounting Lists under the Accounting section. For each category:

• Choose Material or Service type
• Assign an appropriate Expense Account
• Add descriptions for user clarity

For manufacturers with complex WIP and routing requirements, labor and machine costs from work centers integrate into standard cost calculations automatically.

Integrating Routings and BOMs with Standard Costs

Assembly items derive standard costs from component Bills of Materials. When you run a standard cost rollup, NetSuite:

• Calculates each component's standard cost contribution
• Adds labor costs from routing work centers
• Applies overhead rates from cost categories
• Sums to create total assembly standard cost

This ensures BOM changes automatically flow through to assembly costs without manual recalculation.

Inputting and Updating Standard Costs for Materials and Labor

Standard costs require periodic review and updates to reflect significant changes in costs and production, though the ideal frequency depends on your market's stability.

Steps to Manually Enter Standard Costs for Inventory Items

For individual items, enter standard costs directly on the item record. For bulk updates:

1. Create Standard Cost Version:
2. Navigate to your Accounting Lists and create a new Standard Cost Version
3. Enter descriptive name (e.g., "Q1-2025")
4. Select Location
5. Choose Inventory Standard Cost source (Item Default recommended)
6. Enter Planned Standard Costs:
7. Create new Planned Standard Cost entries
8. Select Standard Cost Version
9. Choose Item and Location
10. Add cost breakdown by Cost Category in sublist
11. Save
12. Run Planned Standard Cost Rollup:
13. Create a new rollup transaction
14. Select Standard Cost Version and Effective Date
15. Check All Items or select specific items
16. Check Update Inventory Cost and Rollup Assemblies Based on Components
17. Submit

Automating Standard Cost Updates

For landed cost scenarios where material costs include freight and duties, consider SuiteScript automation that:

• Monitors supplier price changes
• Flags items where standard cost deviates significantly from recent purchases
• Generates email alerts for cost review

This proactive approach prevents variance account buildup from outdated standards.

Managing Production Tracking with NetSuite Standard Costing

The real power of standard costing emerges during production. Every work order completion, assembly build, and inventory adjustment generates variance entries that expose inefficiencies.

Leveraging Work Orders and Assembly Builds for Cost Tracking

When production completes against standard costs, NetSuite compares:

• Planned material quantities vs. actual consumption
• Standard material costs vs. actual purchase prices
• Expected labor hours vs. actual time recorded
• Budgeted overhead vs. applied rates

Each difference posts to the appropriate variance account. For advanced manufacturing environments, routing integration adds labor efficiency and machine utilization variances.

Monitoring WIP and Routings Against Standard Costs

Work-in-process tracking becomes straightforward with standard costing. As materials move through production stages:

• WIP values accrue at standard cost
• Routing completions add standard labor per operation
• Final completion releases finished goods at full standard cost
• Any actual cost differences hit variance accounts

This creates clean inventory valuation—finished goods carry consistent values regardless of when they were produced.

Analyzing Variances: Production Tracking Performance Insights

Variance analysis transforms raw data into actionable intelligence. The Cost Variance Analysis SuiteApp (available in NetSuite 2024.2+) provides drill-down visibility into work order cost overruns.

Interpreting Material and Labor Variances in NetSuite

Common variance types and their implications:

Purchase Price Variance (PPV)

• Standard cost minus actual purchase price × quantity
• High PPV indicates procurement issues or outdated standards
• Review weekly with purchasing team

Production Quantity Variance

• Standard material quantity minus actual consumption × standard cost
• Signals waste, scrap, or process inefficiency
• Investigate with production managers

Labor Efficiency Variance

• Standard hours minus actual hours × standard labor rate
• Reveals training needs or scheduling problems
• Track by work center and shift

Using Variance Reports for Continuous Improvement

Build a monthly variance review meeting agenda:

1. Review top 10 unfavorable variances by dollar impact
2. Identify root causes (supplier, process, standard accuracy)
3. Assign corrective actions with owners and deadlines
4. Track improvement against prior period variances

Organizations implementing this discipline see measurable improvements in gross margin consistency and cost control.

NetSuite Reports and Searches for Standard Costing Accuracy

Built-in variance reports provide starting points, but custom saved searches deliver manufacturer-specific insights.

Building Custom Saved Searches for Cost Variance Analysis

Create searches that surface actionable information:

Stale Standard Costs Search

• Items where standard cost unchanged for 6+ months
• AND variance consistently exceeds 20%
• Flags items needing cost review

Purchase Price Variance by Vendor

• Groups PPV by supplier
• Identifies vendors consistently exceeding standards
• Supports contract renegotiation

Production Variance by Item

• Summarizes quantity and cost variances by finished good
• Highlights products with persistent production issues
• Guides process improvement focus

Key Financial Reports Impacted by Standard Costing

Standard costing affects several critical reports:

• Income Statement: COGS reflects standard costs; variances may be separate line items or allocated
• Balance Sheet: Inventory valued at standard; variance accounts may appear as adjustments
• Inventory Valuation: Clean, consistent values regardless of purchase timing
• Gross Margin Analysis: Predictable margins enable better pricing decisions

Best Practices for Maintaining Standard Costs in NetSuite

Long-term success requires disciplined maintenance. Overly rigid standards in dynamic environments can lead to misleading cost information.

Establishing a Regular Review Cycle for Standard Costs

Implement a structured cost review process:

Monthly Activities:

• Reconcile variance accounts (ensure proper expense/capitalization)
• Review top unfavorable variances with department heads
• Document corrective actions taken

Quarterly Activities:

• Update standards for known cost changes (supplier contracts, wage increases)
• Run standard cost rollup for assemblies
• Perform inventory revaluation to activate new standards
• Archive prior cost versions for audit trail

Annual Activities:

• Comprehensive standard cost audit with external CPA
• Benchmark standards against industry data
• Validate BOM accuracy with production engineering

Ensuring Data Integrity and Compliance

For SOX compliance and audit readiness:

• All Inventory Revaluation transactions create permanent GL entries
• System Notes track changes to item standard costs
• Variance transactions reference original transaction numbers
• Custom fields can document cost change approval workflow

Maintain a "reason for cost change" log alongside standard cost updates—auditors appreciate documented rationale.

Troubleshooting Common Standard Costing Issues in NetSuite

Even well-planned implementations encounter problems. Knowing common pitfalls and solutions accelerates resolution.

Identifying and Resolving Cost Variance Inaccuracies

Issue: Can't enable Standard Costing (checkbox grayed out)

• Solution: Enable Multi-Location Inventory first; disable "Use Item Cost as Transfer Cost" in Transfer Order preferences

Issue: Planned Standard Cost rollup creates no records

• Solution: Verify "Update Inventory Cost" is checked AND "Standard Cost" field on item record is populated

Issue: Assembly costs not calculating in rollup

• Solution: Ensure BOMs are defined with component items that have standard costs; check "Rollup Assemblies Based on Components"

Issue: Variance posting to wrong GL account

• Solution: Verify variance accounts set on BOTH item record AND Inventory Costing Preferences

Issue: Large inventory revaluation times out

• Solution: Break into batches of fewer than 500 items; run during off-hours

When to Seek Expert NetSuite Support

DIY Possible:

• Basic inventory items (fewer than 500 items, single location, no assemblies)
• Straightforward BOMs (2-3 levels, fewer than 20 components per assembly)
• Simple variance account structure

Consultant Recommended:

• First-time standard costing implementation
• Migration from legacy ERP with existing standard costs
• Multi-location environments with location-specific standards
• Complex BOMs exceeding 3 levels with multiple subassemblies
• Multi-currency or multi-subsidiary implementations

Why Anchor Group is Your Standard Costing Implementation Partner

Setting up standard costing requires more than checking boxes—it demands understanding how cost accounting integrates with your specific manufacturing operations. Anchor Group's NetSuite implementation team brings deep manufacturing expertise to every engagement.

As an Oracle NetSuite Alliance Partner and SuiteCommerce Partner, Anchor Group has earned recognition including the NetSuite Alliance Partner Spotlight Winner for Retail in 2022. Our team doesn't just know NetSuite—we specialize in manufacturing configurations including work orders, assembly builds, BOMs, WIP, and routing integration.

What makes working with Anchor Group different:

• Industry specialization in wholesale distribution and manufacturing
• 35+ pre-built apps that accelerate implementation
• Midwestern values that prioritize honest communication and reliable delivery
• Post go-live support that ensures long-term success

As one manufacturing client noted after working with our team: "Within the first two meetings, our team's morale and hope for the future dramatically improved since your team is totally on it. They communicate super clearly, and they get things done efficiently."

If your organization is ready to implement standard costing or struggling with an existing configuration, contact Anchor Group for a consultation. You bring business challenges. We'll bring the magic.

Frequently Asked Questions

What is the main difference between standard costing and actual costing in NetSuite?

Standard costing uses predetermined, fixed costs for materials, labor, and overhead, while actual costing (average or FIFO) adjusts inventory values based on real transaction prices. The critical difference is variance visibility—standard costing automatically posts differences between expected and actual costs to variance accounts for analysis. Average costing silently adjusts inventory values without flagging why costs changed. For manufacturers needing performance benchmarking and cost control, standard costing provides actionable insights that other methods cannot deliver.

How often should standard costs be updated in NetSuite?

Standard costs require periodic review and updates to reflect significant changes in costs and production, though the ideal frequency depends on your market's stability. Many manufacturers find quarterly updates work well, but some update more frequently for volatile commodities while maintaining longer cycles for stable materials. Build a 5-10% buffer into standards to account for normal price fluctuations—this prevents constant small variances that obscure meaningful deviations. Overly rigid standards in dynamic environments can lead to misleading cost information.

Can standard costing be applied to all item types in NetSuite?

Standard costing works for inventory items, assembly items, and lot/serial numbered items. It does not apply to non-inventory items, service items, or expense items. Importantly, once you select a costing method for an item, it cannot be changed without deleting and recreating the item record—which loses transaction history. Plan your costing strategy before creating items, and test thoroughly in the sandbox before production configuration.

What are the benefits of using standard costing for production tracking in NetSuite?

Production tracking with standard costing delivers measurable advantages: organizations report significant reductions in inventory valuation errors, faster month-end close due to automated variance posting, and improved gross margin control. For example, a manufacturer could use purchase price variance reports to identify overpriced suppliers and negotiate better contracts, leading to material cost reductions. The predictable cost basis also enables accurate job costing and confident pricing for customer quotes.

How does NetSuite handle production variances when using standard costing?

NetSuite automatically calculates and posts variances when transactions differ from standard costs. Purchase orders create purchase price variance, assembly builds generate quantity and cost variances, and work order completions produce labor and overhead variances. Each variance type posts to designated GL accounts that you configure during setup. The 2024.2 release introduced the Cost Variance Analysis SuiteApp, providing drill-down visibility into work order cost overruns with comparison between planned and actual costs.