Within the fabless semiconductor industry the standard cost approach is usually the norm, but some still argue for the use of actual cost. In reality, actual cost methods – such as specific identification, moving average, FIFO, and LIFO – are less able to deal with the complexities of the semiconductor industry. Actual cost is a more passive way of handling inventory in that it accepts whatever the inventory cost may be. Meanwhile, standard cost is a more active approach and allows the standard cost of goods to be assigned as they move through the system. Variances are recorded and investigated as to the nature of the variance.
Companies that rely on the actual cost approach are presented with several difficulties. It is often assumed that reality keeps up with valuation, but this doesn’t hold true in the semiconductor industry. Often time’s invoices come in weeks, or even months, after the inventory has been manufactured and shipped off. This makes actual cost methods inefficient because they require a wait for inventory to be costed, which is unrealistic. Another obstacle company’s face when using actual cost is yield. Yield is very important in the semiconductor industry and the difference between having 100% vs. 95% yield can have a big impact on the actual cost of goods. Even just 1% can effect both a company’s profitability and helps lower inventory cost. Actual cost systems are not able to support non-cost variables, making the standard cost approach more common for this industry.
Standard cost allows companies to manage costs. It also supports cost and yield planning per unit with each vendor, yield, and cost allocation. It is a very active method in that it allows companies to set goals and measure their progress. These goals can be updated as the company moves forward.
Over time, this method allows finance and operation teams to partner together compare themselves to their budgeting plan, evaluate what the variances mean, and identify the type of issue as short-term or long-term. Another benefit of standard cost is it is a receipt-based costing system. This allows companies to look for and show people how cost occurred. Finally, unlike actual cost, standard cost can handle any sort of volume and velocity. This means the speed, number, and complexity of transactions is not an issue for the standard cost approach. With the right tools and knowledge standard cost has the ability to simplify transactions in the semiconductor industry. It has become the standard approach for understanding costing, valuing and tuning inventory value of semiconductor cost.
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