Standard costing was developed to assist a manufacturer plan and control its operations. Generally accepted accounting principles or GAAP require that a manufacturer’s financial statements comply with the cost principle. This means that the inventories, the cost of goods sold, and the resulting net income must reflect the manufacturer’s actual costs.

Standard costing will meet the GAAP requirements if the variances between the standard costs and the actual costs are properly prorated to the inventories and to the cost of goods sold prior to issuing the financial statements.

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About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the creator of the AccountingCoach Pro which has been praised for its ability to simplify accounting in a way that anybody can understand.

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