Since the financial statements must reflect the cost principle, both the standard costs and the variances must be included in the financial statements.

For example, if a direct material has a standard cost of $400 but the company paid $422, the financial statement must report $422 (the standard cost of $400 plus the price variance of $22).

How the variances are reported on the financial statements is discussed in the last part of our Explanation of Standard Costing.

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