It is easiest to update costs for the highest-dollar components of inventory on a frequent basis, and leave lower-value items for occasional cost reviews.
However, it may be necessary to update standard costs frequently, if actual costs are continually changing. The result does not exactly match the actual cost of inventory, but it is close. It is extremely easy to print a report showing the period-end inventory balances (if you are using a perpetual inventory system), multiply it by the standard cost of each item, and instantly generate an ending inventory valuation. Also, since a key application of the budget is to compare it to actual results in subsequent periods, the standards used within it continue to appear in financial reports through the budget period. A budget is always composed of standard costs, since it would be impossible to include in it the exact actual cost of an item on the day the budget is finalized. In most cases, users are probably not even aware that they are using standard costing, only that they are using an approximation of actual costs. Though most companies do not use standard costing in its original application of calculating the cost of ending inventory, it is still useful for a number of other applications. The cost accountant may periodically change the standard costs to bring them into closer alignment with actual costs. Since standard costs are usually slightly different from actual costs, the cost accountant periodically calculates variances that break out differences caused by such factors as labor rate changes and the cost of materials.
This results in significant accounting efficiencies. The core reason for using standard costs is that there are a number of applications where it is too time-consuming to collect actual costs, so standard costs are used as a close approximation to actual costs. Standard costing involves the creation of estimated (i.e., standard) costs for some or all activities within a company. This approach represents a simplified alternative to cost layering systems, such as the FIFO and LIFO methods, where large amounts of historical cost information must be maintained for inventory items held in stock. Subsequently, variances are recorded to show the difference between the expected and actual costs. Standard costing is the practice of substituting an expected cost for an actual cost in the accounting records.