Which operation corresponds to the treatment of favorable variances in standard costing when calculating cost of goods sold?

Which operation corresponds to the treatment of favorable variances in standard costing when calculating cost of goods sold?

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

Answer: (D)

In standard costing, you calculate cost of goods sold using the standard cost and then adjust for the variances between actual and standard costs. A favorable variance means actual costs were lower than the standard, so the COGS should be reduced to reflect the better performance. Therefore you subtract the total favorable variance from the standard COGS to get the actual COGS. If the variance were unfavorable, you would add it to COGS instead. For example, if the standard COGS is 500,000 and the favorable variance is 20,000, the actual COGS would be 480,000.

In standard costing, you calculate cost of goods sold using the standard cost and then adjust for the variances between actual and standard costs. A favorable variance means actual costs were lower than the standard, so the COGS should be reduced to reflect the better performance. Therefore you subtract the total favorable variance from the standard COGS to get the actual COGS. If the variance were unfavorable, you would add it to COGS instead. For example, if the standard COGS is 500,000 and the favorable variance is 20,000, the actual COGS would be 480,000.