What is Standard cost?

If you buy the same SKU from one supplier at a steady price, standard cost makes your margin reports simple to read. You set one cost per unit, usually matching what you expect to pay next, and use that figure for every sale until you update it.

Standard cost becomes less useful if your supplier changes prices often or you buy the same item from different suppliers at different rates. In that case the gap between standard cost and actual cost, called a variance, can grow and hide real margin changes. Review and update your standard cost whenever a new purchase order comes in at a different price than before.

Example

A candle store sets a standard cost of $4.00 per unit for its 8oz jar candle at the start of the year. In March a new purchase order from the supplier arrives at $4.30 per unit due to a wax price increase. The store keeps reporting margin using $4.00 until it manually updates the standard cost, which means March margin reports overstate profit by $0.30 per unit sold.

Common mistakes

• Never updating standard cost after supplier price increases, which overstates margin.
• Using standard cost for items bought from multiple suppliers at different prices without checking the variance.
• Confusing standard cost with weighted average cost, which recalculates automatically with each purchase.

Standard cost and SteadyShelf

SteadyShelf uses the unit cost on each supplier's purchase order to size and cost draft orders, so updating your cost figures keeps those drafts accurate.

SteadyShelf is launching on the Shopify App Store. Join early access to get the install link first.

Related terms

Weighted average cost · Unit cost · Gross margin · Cost of goods sold · Inventory valuation

Full inventory glossary

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