During the preparation of a standard costing income statement, favorable variances reduce the standard cost of goods sold by being what?

During the preparation of a standard costing income statement, favorable variances reduce the standard cost of goods sold by being what?

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

Answer: (A)

In a standard costing income statement, you use the standard cost of goods sold as the baseline and then adjust for variances. A favorable variance means actual costs were lower than the standard, so that amount reduces the standard COGS. You subtract the favorable variance from the standard COGS to arrive at the COGS that reflects the better-than-expected performance. For example, if the standard COGS is 100,000 and there is a 5,000 favorable variance, the COGS shown would be 95,000. If the variance were unfavorable, you would add it, increasing COGS.

In a standard costing income statement, you use the standard cost of goods sold as the baseline and then adjust for variances. A favorable variance means actual costs were lower than the standard, so that amount reduces the standard COGS. You subtract the favorable variance from the standard COGS to arrive at the COGS that reflects the better-than-expected performance. For example, if the standard COGS is 100,000 and there is a 5,000 favorable variance, the COGS shown would be 95,000. If the variance were unfavorable, you would add it, increasing COGS.