At the end of the accounting period, if the net amount of the variances is immaterial, the variance accounts are closed to:

• A. Cost of Goods Sold
• B. Retained Earnings
• C. Inventory
• D. Operating Income

Answer: (A)

Variance accounts track the difference between what standard costs say and what actually happened in production. When the total net variance is immaterial, the practical and proper step is to close those balances into the cost of goods sold. This treatment embeds the small cost deviations directly into the period’s cost of goods sold, aligning the recorded expense with actual production activity without cluttering the financial statements with minor adjustments. Closing to retained earnings would shift the impact to equity rather than the income statement, closing to inventory would leave the adjustment in assets rather than reflecting it as part of the period’s production cost, and closing to operating income isn’t a standard closing destination. Therefore, the net immaterial variance is closed to cost of goods sold.