NetSuite Standard Costing: Setup & Variances (2026)

What standard costing means in NetSuite

Standard costing assigns a predetermined cost to each item rather than tracking the actual cost of each purchase or production run. You define what an item should cost — based on expected material prices, labor rates, and overhead allocations — and the system values inventory at that standard. When actual costs differ from the standard, the difference posts to variance accounts.

TL;DR: NetSuite standard costing lets you set predetermined item costs and automatically captures purchase price variances, production variances, and revaluation variances in separate GL accounts. It is ideal for manufacturers who need cost control visibility, while average costing is better suited for distributors and retailers with simpler operations.

This approach is common in manufacturing where hundreds or thousands of items flow through production daily. Tracking actual cost per unit through multi-step production processes is operationally complex; standard costing simplifies it by using the predetermined rate and capturing deviations as variances.

NetSuite supports standard costing as one of its inventory costing methods alongside average, FIFO, and LIFO. Once assigned to an item, the standard cost determines how inventory is valued on the balance sheet and how cost of goods sold is calculated when items are sold or consumed.

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How it works in NetSuite

Setting the standard cost

Each item has a standard cost field that you set manually or through a cost rollup process. For purchased items, the standard cost reflects the expected purchase price plus any landed cost components. For manufactured items, it reflects the expected material cost, labor cost, and overhead allocation from the bill of materials and routing.

Cost rollup for manufactured items calculates the standard cost from the BOM components. If an assembled product contains three raw materials with standard costs of $5, $3, and $2, plus $4 in labor and $2 in overhead, the rolled-up standard cost is $16. NetSuite can perform these rollups automatically when you update component costs.

Variance capture

When a transaction occurs at a price different from the standard, the difference goes to a variance account rather than changing the inventory value.

Purchase price variance (PPV). You receive an item with a standard cost of $10 but the vendor invoice is $11. The inventory records at $10 (the standard). The $1 difference posts to the PPV account. This keeps your inventory valuation consistent while capturing pricing deviations.

Production variances. A work order consumes more material or labor than the standard BOM specifies. The excess cost goes to production variance accounts. This reveals production inefficiency separate from the product cost.

Standard cost revaluation. When you update the standard cost (typically annually or semi-annually), existing inventory revalues to the new standard. The difference between old and new standard costs for on-hand inventory posts to a revaluation variance account.

Variance analysis

The power of standard costing is in the variance analysis. Each variance type tells a different story:

• PPV trending upward → Your material costs are rising. Negotiate with vendors or find alternatives.
• Production material variance consistently negative → You're using more material than planned. Review production processes or update the BOM.
• Labor variance high → Production is taking longer than expected. Review training, equipment, or scheduling.
• Volume variance significant → You're producing at different volumes than planned. Review capacity utilization.

NetSuite reports on these variances through saved searches and financial reports. A monthly variance review identifies trends before they become significant cost problems.

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Configuration in NetSuite

Enabling standard costing

Standard costing is set at the item level — you select "Standard" as the costing method when creating or editing an item record. You can have different costing methods for different items, though most companies standardize on one method across product categories.

Important: Once an item has transactions, changing its costing method is complex and should be done with care. Choose your costing method before going live with inventory transactions.

Variance accounts

Configure variance accounts in your chart of accounts:

• Purchase Price Variance — captures differences between PO price and standard cost
• Production Variance (Material) — captures material usage variances in production
• Production Variance (Labor) — captures labor cost variances
• Standard Cost Revaluation — captures the impact of standard cost updates on existing inventory

These accounts typically sit in the cost of goods sold section of the P&L, below the standard COGS line. This gives you a clean view: standard cost shows what things should cost, variances show how actuals deviated.

Standard cost updates

Most companies update standard costs annually or semi-annually, typically aligned with budget cycles. The update process:

1. Review current actual costs vs existing standards
2. Propose new standard costs based on expected pricing, volumes, and efficiency
3. Approve new standards (finance + operations alignment)
4. Update standard costs in NetSuite (can be done in bulk via CSV)
5. Run the revaluation to adjust existing inventory to new standards
6. Analyze the revaluation variance to understand the cost change impact

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Standard vs average costing

Factor	Standard Costing	Average Costing
Inventory value	Fixed at predetermined rate	Fluctuates with each purchase
Variance visibility	Explicit variance accounts	Variances absorbed into COGS
Setup effort	Higher (must define standards)	Lower (system calculates automatically)
Cost control insight	Strong (variances highlight deviations)	Weaker (variances hidden in averages)
Best for	Manufacturing, high-volume purchasing	Distribution, retail, simpler operations
Maintenance	Requires periodic standard updates	Self-maintaining

Use standard costing when:

• You manufacture products and need to track production efficiency
• You want explicit variance analysis for cost control
• Your purchasing team needs PPV visibility for negotiation
• Your cost accounting requirements include variance reporting

Use average costing when:

• You buy and resell without manufacturing
• You want simpler cost management with less maintenance
• Cost fluctuations are normal for your business and don't need individual tracking
• Your team doesn't have the capacity to maintain and update standards

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The bottom line

Standard costing is a cost management discipline, not just an inventory valuation method. The variance data it produces drives purchasing negotiations, production improvements, and pricing decisions. But it requires commitment — someone needs to set meaningful standards, update them periodically, and actually review the variances.

For manufacturers on NetSuite, standard costing with proper variance analysis is one of the highest-value financial configurations you can implement. For distributors and retailers, average costing is usually the simpler and more appropriate choice.

Frequently Asked Questions

What is standard costing in NetSuite?expand_more

What is the difference between standard costing and average costing in NetSuite?expand_more

How do you update standard costs in NetSuite?expand_more

What is purchase price variance (PPV) in NetSuite?expand_more

Can you change an item's costing method in NetSuite after it has transactions?expand_more