Which statement best describes the treatment of favorable variances in the standard costing format for cost of goods sold?

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

Answer: (B)

In standard costing, costs and inventory are valued at standard rates, and any difference between actual and standard costs is tracked as variances. A favorable variance means actual costs were lower than the standard. To reflect this saving in the cost of goods sold, you subtract the favorable variance from the standard COGS, resulting in a lower COGS figure on the income statement. This is why subtracting is the correct treatment—the lower actual costs reduce what is reported as COGS and, in turn, increase reported profitability. If you were to add the variance or ignore it, the COGS would not accurately reflect the savings from the favorable performance.