In standard costing, favorable variances are applied to cost of goods sold by performing which operation?

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

Answer: (B)

In standard costing, the cost of goods sold is based on standard costs, and any difference between actual and standard costs shows up as variances. When a variance is favorable, it means actual costs were lower than the standard costs. To reflect this lower cost on the income statement, you reduce COGS by the amount of the favorable variance—that is, subtract the favorable variance from the standard COGS. For example, if standard COGS is 200,000 and the favorable variance is 5,000, the COGS reported would be 195,000. Adding to COGS would raise the expense and misstate the savings, while excluding or ignoring the variance would fail to reflect the lower actual cost.