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Accounting SmartBook Practice Test

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In the standard costing income statement, favorable variances are accounted for as a deduction from cost of goods sold at standard cost. Which statement best describes this treatment?
Correct Answer:
Subtracted from
Explanation:
In standard costing, you price and report COGS using a standard cost, then adjust for how actual costs compare to that standard. A favorable variance means actual costs were lower than the standard, so the amount is subtracted from the standard COGS to reflect the lower expense on the income statement. For example, if standard COGS is 100,000 and the favorable variance is 5,000, the COGS reported would be 95,000. If the variance were unfavorable, you would add it to COGS, increasing the expense. So the best description is that the favorable variance is subtracted from COGS.

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