The Pros and Cons of an Inventory Standard Costing System: Insights with Michael Goetz, CPA

ARTICLE | July 08, 2026

Authored by FMF&E

Standard costing is an inventory valuation method used by manufacturing and distribution companies in which predetermined costs are assigned to products rather than tracking actual costs as they occur. When implemented and managed well, it can be a powerful tool for cost control and operational insight. But it also comes with real challenges that companies need to navigate carefully.

We sat down with Michael Goetz, CPA, Audit Partner at FMF&E, to get his perspective on what works, what doesn't, and what companies need to know before adopting this approach. Having spent his entire professional career at FMF&E, Mike has experience providing audit, review, compilation, accounting and business advisory services to construction contractors, manufacturers and distributors.

Q: What is the single biggest benefit companies realize when they implement a standard costing system?

Michael: Having improved cost control. It allows companies to really focus on variance analysis -- comparing their actual material, labor, and overhead costs versus the standard costs that they set for those same cost components.

Q: When companies are performing variance analysis, how do they distinguish between variances that deserve management attention versus normal noise in the system?

Michael: In these instances, they really need to collaborate among all the departments in their company, meaning accounting and finance taking the lead, collaborating with production, operations, and engineering -- perhaps even the sales department -- so that each different department can really dig into the details of what's behind those variances and whether or not they're meaningful.

Q: When you dig into why actual costs differ from standards, what are the most common root causes?

Michael: The biggest fluctuations I usually see in my experience are driven by materials and the fluctuating costs of materials in the market -- whether those can go up or down. That's usually the biggest variable.

Q: How frequently should companies update their standards to keep them aligned with current market conditions?

Michael: Annual updating may be enough, but it really falls back on the variance analysis, which the accounting and finance department should be performing ideally on a monthly basis -- certainly at the very least quarterly -- to determine the significance of those variances. If the variances are not significant, then there's less of a need to update those standard costs. If you're seeing significant variances from month to month or quarter to quarter, then you need to be drilling down and updating those standards more frequently.

Q: What is the most common pitfall or mistake companies make when implementing or using standard costing?

Michael: A couple of things. Number one, it's a pretty large administrative effort to update standard costs. It needs to be a collaboration among the accounting and finance department, production, operations, and engineering -- and that's a pretty big lift. It involves quite a bit of time, and sometimes companies just don't have the time or the resources to sit down and spend a week analyzing their variances and resetting their standards.

The other challenge is trying to determine what variances are meaningful. It needs to be a collaborative effort to sit down with all of the departments and drill down on labor and overhead variances -- why were there variances on certain products or certain projects -- and then determining whether they're significant enough to act on.

Q: What types of businesses are the best fit for standard costing versus those that might be better served by a different costing method?

Michael: I think it's really suitable for manufacturing and distribution companies that have pretty standard products where their products don't differentiate significantly from one to the next, and there's not a lot of volatility in the market prices of the materials that go into those products. If their products are pretty similar and standardized, it makes it a lot easier to use a standard cost system. Whereas when there's a lot of volatility from product to product and in material prices, it makes it a lot harder to pin down an accurate standard cost.

Q: What do companies need to be most careful about to ensure their standard costing approach stays compliant with GAAP? What are the red flags auditors typically look for?

Michael: We're looking at a couple of things. Again, going back to the magnitude of the variances and absorption analysis -- how big are those variances? And second, are they actually going through the exercise of updating their standard costs? If a company is setting standard costs and not taking the time to evaluate the variances, or not taking a step back to determine if the standards are still accurate, those are the two biggest red flags that cause concern for auditors in a financial statement audit.

Q: For a company that has been using standard costing and finds it isn't working as well as hoped, what is the first thing you'd recommend they look at to diagnose what's going wrong?

Michael: I think it needs to be a collaborative discussion within the entire organization from the top down -- the president, CEO, accounting and finance department, pulling in operations -- to identify what's driving the significant variances. Is it material? Is it labor? Is it overhead? And again, if the variances are too volatile or there's too much fluctuation from product to product, then perhaps a standard cost system doesn't make sense for that organization.

Michael Goetz is an Audit Partner at Firley, Moran, Freer & Eassa, CPA, P.C. (FMF&E). For questions about standard costing, inventory valuation, or accounting and advisory services for your manufacturing or distribution business, contact our team at fmfecpa.com.