Preparing Standard Cost Income Statements

Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.

If your firm is going to use a standard cost system of accounting, then you should prepare to deal with plenty of standard cost income statements every accounting period. This lesson shows you how to prepare them.

Standard Cost Income Statement

Just like any other business, a company that uses standard cost accounting, an accounting system based on standard costs rather than exact costs, still has to post income statements every period. However, a crucial part of using a standard cost accounting system is knowing the variances that occur. Remember that variances are those deviations from the planned standard cost. Therefore, instead of a usual income statement, companies prepare a standard cost income statement that shows variances to each area as their own section. This lets managers and accountants quickly have access to the variances that could require their attention.

In this lesson, we'll learn how to prepare a standard cost income statement, especially with respect to how to treat variances as they occur.

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  • 0:00 Standard Cost Income Statement
  • 0:50 Preparation
  • 1:37 Counting Cost Variances
  • 2:15 Other Elements
  • 2:45 Lesson Summary
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Preparation

The first section that you'll prepare when doing a standard cost income statement is the sales section. First, list your expected sales numbers. This is often a standard cost. Next, add or subtract any variance to the sales price. For example, you could end up selling more in a given period than expected. List that here. Finally, subtract any discounts or incentives that you offered customers to close deals. Find the total of these three numbers - that is your net sales.

Next, you have to calculate the cost of sales. Often, this is a simple line item or two. For example, your income statement may list 'standard raw materials cost' or 'standard labor cost.' It could even just say 'standard cost of production.' In any event, put that here. From this, you'll subtract variances.

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