Editing Cost accounting (section)

==Standard cost accounting==
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{{main|Standard cost accounting}}
Standard Costing is a technique of Cost Accounting to compare the actual costs with standard costs (that are pre-defined) with the help of Variance Analysis. It is used to understand the variations of product costs in manufacturing.<ref>{{Cite book |url=https://ebooks.ibsindia.org/mac/chapter/240/ |title=Management Accounting & Control |publisher=Icfai Business School |location=India |pages=15–16}}</ref> Standard costing allocates fixed costs incurred in an accounting period to the goods produced during that period. This allowed the ''full cost'' of products that were not sold in the period they were produced to be recorded as 'inventory' in the Balance sheet to be carried forward to the next accounting period, using a variety of complex accounting methods, which was consistent with the principles of [[Generally Accepted Accounting Principles|GAAP]] (Generally Accepted Accounting Principles). It also essentially enabled managers to ignore the fixed costs, and look at the results of each period in relation to the "standard cost" for any given product.

:For Example: if the railway coach company normally produced 40 coaches per month, and the fixed costs were still $1000/month, then each coach could be said to incur an Operating Cost/overhead of $25 =($1000 / 40). Adding this to the variable costs of $300 per coach produced a full cost of $325 per coach.

This method tended to slightly distort the resulting unit cost, but in mass-production industries that made one product line, and where the fixed costs were relatively low, the distortion was very minor.

:For Example: if the railway coach company made 100 coaches one month, then the unit cost would become $310 per coach ($300 + ($1000 / 100)). If the next month the company made 50 coaches, then the unit cost = $320 per coach ($300 + ($1000 / 50)), a relatively minor difference.

An important part of standard cost accounting is a [[Variance analysis (accounting)|variance analysis]], which breaks down the variation between actual cost and standard costs into various components (volume variation, material cost variation, labor cost variation, etc.) so managers can understand ''why costs were different from what was planned'' and take appropriate action to correct the situation.