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.
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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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.
Counting Cost Variances
For sales variances, typically only one line item in the income statement is necessary. This could differ if there are especially large variances, however. That said, the cost of production section should always split up its variances by category. This way, managers can see where money is being saved and where money is being spent too fast. A positive number here translates to a favorable variance, while a negative number translates to an unfavorable variance. Remember that positive variances save money, while negative variances cost more money. Typical line items for this section include manufacturing overhead, labor, and raw materials.
Beyond the variances, the next item will often be a gross profit. This is shown as a percentage of the total sales. However, don't get too excited yet. Next, you have to subtract all other overhead costs. After all, you only accounted for production-related costs before. This should cut into your profit. Finally, you'll end up with a net profit that is equal to the gross profit minus all overhead costs. Sometimes this is also expressed as a percentage of total sales.
In this lesson, we learned how to make a standard cost income statement. These income statements are crucial to those firms that use a standard cost system of accounting, because they regularly show the amounts of variances that are crucial for planning purposes. In addition to the typical elements of an income statement, a standard cost income statement also includes information about variances for both sales and expenses.
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Preparing Standard Cost Income Statements
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