Odoo supports three costing methods, and a manufacturer has to choose one for its products. This piece compares the costing methods and how an Odoo manufacturer should choose between them.
The three methods
Odoo supports three costing methods: standard cost, average cost, and first-in-first-out, known as FIFO. The costing method determines what cost is assigned to a product and recognised when it moves. The method is set per product or per product category, so a manufacturer can apply different methods to different kinds of product. Understanding how each behaves is the basis for choosing.
Standard cost
With standard cost, a product carries a fixed, predetermined cost, set deliberately based on what the product is expected to cost. The product is valued at that standard regardless of fluctuations in what was actually paid or spent, and the difference between the standard and the actual is captured as a variance. The character of standard cost is stability and predictability: the manufacturer always knows what its products are costed at. It suits a manufacturer that wants a planned, stable basis for its costs and the discipline of variance analysis, and whose costs are stable enough that a standard remains meaningful. Its weakness is that, if costs are volatile, the fixed standard drifts from reality and produces large variances until it is updated.
Average cost
With average cost, a product's cost is a running weighted average of what has been paid or spent on it. As new stock comes in at different costs, the average adjusts. The character of average cost is that it smooths fluctuations: instead of the cost jumping with every price change, it moves gradually as the average shifts. It does not need the deliberate setting and updating that standard cost requires, and it does not produce variances in the same way. Average cost is a sensible, balanced default for many manufacturers: it tracks real costs reasonably while smoothing out noise.
First-in-first-out (FIFO)
With FIFO, the assumption is that the oldest stock is used first, and stock is valued, and cost recognised, at the actual cost of the specific units, oldest first. The character of FIFO is that it tracks actual costs closely and specifically: the cost recognised reflects what those particular units actually cost. It suits a manufacturer that wants valuation and cost to follow real purchase costs precisely, rather than being smoothed into an average or fixed as a standard. The trade is that, because it follows actual costs unit by unit, the cost recognised can move as the actual costs of successive batches of stock differ.
How a manufacturer should choose
The choice comes down to what the manufacturer wants from its costing, and how stable its costs are.
If a manufacturer values a stable, planned basis for its costs, wants the discipline of variance analysis, and has reasonably stable costs, standard cost fits.
If a manufacturer wants a balanced approach that tracks real costs while smoothing out fluctuations, and does not want the upkeep of standards, average cost is a sound default.
If a manufacturer wants its valuation and cost to follow actual purchase costs closely and specifically, FIFO fits.
The stability of the manufacturer's costs is a key factor: volatile costs make a fixed standard awkward and argue toward average or FIFO; stable costs make standard cost workable. And because the method is set per product or category, a manufacturer is not forced into one choice for everything; it can apply the method that suits each kind of product.
Choose deliberately, and get advice if unsure
One honest note. The costing method affects how inventory is valued and how cost of goods is recognised, which has accounting implications. A manufacturer should choose its costing method deliberately, understanding how each behaves, and, because the choice interacts with accounting, it is sensible to make the decision with proper accounting input rather than casually. The method, once chosen and in use, shapes the cost figures the manufacturer runs on, so it is worth choosing well.
The takeaway
Odoo offers three costing methods for manufacturers: standard cost, fixed and stable, with variance analysis, suiting stable costs; average cost, a smoothed running average, a balanced default; and FIFO, tracking actual costs closely and specifically. Choose on what the manufacturer wants from costing and how stable its costs are, applying the method per product or category as suits. Choose deliberately, with accounting input, because the method shapes the cost figures the business runs on. For how we approach Odoo for manufacturers, see our manufacturing work.