Favorable variances in standard costing are incorporated into COGS by which mechanism?

Favorable variances in standard costing are incorporated into COGS by which mechanism?

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

Answer: (B)

Favorable variances mean actual costs are lower than what the standard costs predict. In a standard costing system, COGS is valued at the standard cost, and variances are used to adjust toward actual results. To reflect the cheaper cost, you subtract the favorable variance from the standard COGS. For example, if standard COGS is 100 and the favorable variance is 5, the COGS reported becomes 95. The variance itself is tracked separately, but its effect on COGS is downward. (If the variance were unfavorable, you would add it to COGS, increasing the cost.)

Favorable variances mean actual costs are lower than what the standard costs predict. In a standard costing system, COGS is valued at the standard cost, and variances are used to adjust toward actual results. To reflect the cheaper cost, you subtract the favorable variance from the standard COGS. For example, if standard COGS is 100 and the favorable variance is 5, the COGS reported becomes 95. The variance itself is tracked separately, but its effect on COGS is downward. (If the variance were unfavorable, you would add it to COGS, increasing the cost.)