If standard cost variances are allocated (i.e., prorated) to inventory and cost of goods sold (CGS) accounts at the end of a period, which of the following is correct?
A) Conceptually, the amount allocated to each account is based on the relative amount of the current period's standard cost in the end-of-period balance in each account.
B) The resulting balances represent relative actual cost in each of the affected accounts.
C) There is a presumption that the net variance for the period is immaterial in amount.
D) The amount allocated to inventories is generally larger than the amount allocated to CGS.
E) Adjusting journal entries for income tax effects will have to be made.

Question

Quizplus · Accepted Answer

The allocation of standard cost variances to inventory and cost of goods sold (CGS) accounts at the end of a period is based on the relative amount of the current period's standard cost in each account, which is conceptually the most appropriate method. Therefore, option A is correct. Option B is incorrect because the resulting balances do not represent actual costs but rather the allocated standard cost variances. Option C is incorrect because the materiality of the net variance is irrelevant to the allocation process. Option D is incorrect because the amount allocated to inventory and CGS depends on the actual ending balances in each account and the variance amount. Option E is irrelevant to the allocation process.

If Standard Cost Variances Are Allocated (I