When presenting a standard costing income statement, the effect of favorable variances on cost of goods sold is to reduce COGS by which treatment?

When presenting a standard costing income statement, the effect of favorable variances on cost of goods sold is to reduce COGS by which treatment?

• A. Subtracted from
• B. Added to
• C. Excluded from
• D. Ignored

Answer: (A)

In a standard costing system, COGS is recorded using the standard cost for the goods sold, and variances adjust that amount. When a variance is favorable, actual costs are lower than the standard costs, so this favorable difference reduces the expense reported as COGS. That reduction is shown by subtracting the favorable variance from COGS on the income statement. If costs were higher (an unfavorable variance), you would add to COGS, increasing the expense. Excluding or ignoring the variance would misstate the true cost of goods sold.

In a standard costing system, COGS is recorded using the standard cost for the goods sold, and variances adjust that amount. When a variance is favorable, actual costs are lower than the standard costs, so this favorable difference reduces the expense reported as COGS. That reduction is shown by subtracting the favorable variance from COGS on the income statement. If costs were higher (an unfavorable variance), you would add to COGS, increasing the expense. Excluding or ignoring the variance would misstate the true cost of goods sold.