A purchased item is manufactured in-house sometimes.The cost of manufacture is lower compared to purchase price of the item. Is there anyway to reflect this in the standard price of the item? So that the standard cost price should be average purchase price and manufacuring cost.

Not automatically that I know of. But you could set it as Purchased, input the price that you calculate to be the average in Item Data and then roll up the cost (set to use the input purchase price), and then put it back to Manufactured (if that is how you want the default set). The whole idea of Standard costs is to provide a baseline from which to measure variances. So if it is "normally" purchased it would be correct to have average or latest purchase cost as the standard and to get a favourable variance if you manufacture it.