Under standard costing reporting, favorable variances reduce the reported cost of goods sold by being which of the following on the standard cost?

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

Answer: (C)

Under standard costing, costs are built into a standard cost per unit and used to value cost of goods sold. When actual costs come in lower than the standard (a favorable variance), that savings is reflected by subtracting the favorable variance from the standard cost when determining COGS. This reduces the amount reported as cost of goods sold. If the variance were unfavorable, it would be added to the standard cost, increasing COGS. The variances themselves are tracked separately, but the effect on the income statement is to subtract favorable variances from the standard cost to arrive at the reported COGS.