Generally, the variance measures the standard cost of an inventory item against the actual cost (i.e., the invoice) and the difference is recorded in a variance account. The variance account helps management isolate differences to see how efficiently they are operating. Standard costing is acceptable for valuing inventory as long as there is not a significant difference between actual and standard. If there is a significant difference, the inventory amounts should be adjusted to actual. You should seek the advice of your accounting/audit firm to determine what is a reasonable variance. A large difference is argued to result in a misstatement of your financial results in your income statement. Standard costs are usually adjusted at certain intervals to reflect current cost conditions of your inventory items.
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