For a standard costing income statement, the proper treatment of a favorable variance on cost of goods sold at standard cost is to have it ______.

For a standard costing income statement, the proper treatment of a favorable variance on cost of goods sold at standard cost is to have it ______.

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

Answer: (D)

In a standard costing income statement, COGS is shown at its standard amount, and any difference between actual and standard costs is captured as a variance. When the variance is favorable, actual costs are lower than standard, so the COGS figure on the income statement should be reduced. Subtracting the favorable variance from standard COGS reflects this cost savings and increases reported profitability. Adding or ignoring the variance would misstate the impact of the cost savings. An unfavorable variance would have the opposite effect and would be added to COGS, increasing expenses.

In a standard costing income statement, COGS is shown at its standard amount, and any difference between actual and standard costs is captured as a variance. When the variance is favorable, actual costs are lower than standard, so the COGS figure on the income statement should be reduced. Subtracting the favorable variance from standard COGS reflects this cost savings and increases reported profitability. Adding or ignoring the variance would misstate the impact of the cost savings. An unfavorable variance would have the opposite effect and would be added to COGS, increasing expenses.