Average vs. Standard Costing in Business Central for Canadian Food Manufacturers

Estimated reading time: 7 minutes

Most mid-market Canadian food manufacturers made a costing decision with their ERP partner during implementation. The problem is not that the decision was wrong at the time. The problem is that the business has changed since then. More SKUs, more volatile ingredient costs, more complex production. And the costing method has not been revisited. In my years working across manufacturing ERP environments, I have watched CFOs struggle to explain product-level margin variances that trace directly back to a costing method that no longer fits their operation

Three Costing Methods for Food Manufacturers

Average costing recalculates the unit cost of an item every time you receive new inventory. If you buy flour at $0.80/kg in January and $0.95/kg in March, your average cost adjusts with each receipt. Every unit in stock carries the same blended cost regardless of when you purchased it.

Standard costing assigns a predetermined cost to each item based on expected material, labour, and overhead rates. Actual costs flow in separately, and the system captures the difference as a variance. You decide what a kilogram of flour should cost, and the variance report tells you how reality compares.

FIFO (First In, First Out) assigns the actual cost of each specific receipt to outgoing inventory in the order it arrived. Your oldest flour inventory flows to production first, carrying its original purchase cost.

When Average Costing Works

Average costing is straightforward and requires the least maintenance. For Canadian food manufacturers with stable ingredient costs and limited product complexity, it works well enough. If your primary ingredients come from supply-managed commodities (dairy, poultry, eggs) where pricing stays relatively predictable within a quota period, average costing gives you a reasonable picture.

It also works when your product mix is small. A manufacturer running 10-15 SKUs with similar production processes does not gain much from the additional overhead of standard costing.

When Average Costing Fails

Average costing hides margin problems when ingredient costs are volatile. Canadian food manufacturers sourcing cocoa, coffee, canola oil, or imported spices know this volatility firsthand. When your cocoa cost swings 30% over a quarter, average costing smooths that swing across your entire inventory. Your COGS looks stable on paper, but individual batch margins are fiction.

The problem compounds with high product mix complexity. A manufacturer running 80 SKUs with different ingredient profiles and production complexities needs to know which products actually make money. Average costing blends everything together and makes that question nearly impossible to answer at the product level.

Seasonal ingredients create a similar problem. If you buy strawberries at $2.50/kg in July and $5.80/kg in January, average costing spreads that cost across all your strawberry-containing products. Your summer batches look less profitable than they are, and your winter batches look more profitable than they are.

The Case for Standard Costing in Food Manufacturing

Standard costing gives you something average costing cannot: variance visibility. When you set a standard cost for each ingredient, each labour operation, and each overhead component, every production run generates a variance report. That report tells you exactly where reality diverged from expectation.

For a Canadian food manufacturer, that means:

• Purchase price variance tells you if ingredient costs run above or below plan
• Usage variance tells you if production consumes more or less material than the recipe specifies
• Labour variance shows whether production runs take more or less time than expected
• Overhead variance flags absorption gaps

This variance data feeds directly into pricing decisions. If your purchase price variance on dairy ingredients runs consistently negative (costs above standard), you know your product pricing needs to adjust before your margins erode further.

The trade-off: standard costs require maintenance. You need to review and update standards periodically, typically annually or when commodity prices shift significantly. If your standards go stale, your variance reports become noise rather than signal.

FIFO and Lot-Controlled Production

FIFO is the most precise costing method because it tracks actual costs at the individual receipt level. For Canadian food manufacturers operating under SFCR lot traceability requirements, FIFO aligns naturally with how inventory already moves: first received, first used.

The practical challenge is complexity. FIFO generates more transaction volume and requires disciplined receiving and consumption processes. For manufacturers already doing lot tracking rigorously, the incremental effort is small. For those with loose lot control, FIFO adds a layer of precision they may not be ready to manage.

FIFO is worth evaluating if your operation relies on high-cost, volatile ingredients where you need to trace the actual purchase cost through to the finished good. It matters less when ingredient costs stay stable and lot-level cost precision does not drive meaningful decisions.

What Switching Costing Methods Actually Involves

Switching costing methods is not just a system setting change. It touches every open inventory value and affects financial reporting going forward.

A costing method transition requires:

• Revaluation of all on-hand inventory at the new costing basis
• Updated standard costs for every item (if moving to standard costing)
• Staff training on how variance reports work and how to interpret them
• Process changes in receiving, production, and month-end close
• Coordination with your accountant on disclosure requirements

The operational disruption is real but manageable with planning. Most manufacturers execute the switch during a low-production period or at fiscal year-end to minimize complexity.

ASPE Reporting Considerations

Canadian private food manufacturers reporting under Accounting Standards for Private Enterprises need to know: switching costing methods is a change in accounting policy. ASPE requires you to apply the new method retrospectively and disclose the change and its financial impact.

No regulatory body mandates a specific costing method. CRA does not prescribe one. But your costing method choice affects inventory valuation on your balance sheet and COGS on your income statement, both of which feed into your tax filings.

For manufacturers claiming SR&ED (Scientific Research and Experimental Development) tax credits, accurate production costing matters. The eligible expenditure calculation can include costs incurred during experimental production runs, and the costing method determines how those costs are separated from routine production. Rough allocations invite CRA scrutiny during the review process.

The Decision Framework

Ask three questions:

1. Can you explain your product-level margins with confidence today?
2. Do your ingredient costs fluctuate more than 10-15% within a fiscal year?
3. Do you need variance visibility to make pricing or production decisions?

If you answered no, yes, yes, average costing is probably not giving you what you need.

The costing method you inherited may have made sense five years ago. The question is whether it still fits the business you are running today.