Recording Variances

Self Test

Cost Accounting

Self Test

Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.

1. When a variance is not material it should be closed to

a. finished goods
b. work in process
c. raw materials
d. cost of goods sold

Answer

D. A variance that is not material should be closed to cost of goods sold. This increases the expense in the current period and is conservative.

2. A material price variance that is significant should be allocated to

a. cost of goods sold
b. raw material
c. raw material, work in process and finished goods
d. raw material, work in process, finished goods and cost of goods sold

Answer

D. The material price variance impacts all inventory related accounts. Some materials purchased are sitting in the raw materials warehouse, some are on the production line, some are part of completed finished goods and some are part of products sold.

3. A material quantity variance that is significant should be allocated to

a. cost of goods sold
b. raw material
c. work in process, finished goods and cost of goods sold
d. raw material, work in process, finished goods and cost of goods sold

Answer

C. The quantity variance comes about as the product is manufactured. Work in process, finished goods, and cost of goods sold are all categories that include products made.

4. A variable overhead efficiency variance that is significant should be allocated to

a. cost of goods sold
b. raw material
c. work in process, finished goods and cost of goods sold
d. raw material, work in process, finished goods and cost of goods sold

Answer

C. The variable overhead efficiency variance comes about as the product is manufactured. Work in process, finished goods, and cost of goods sold are all categories that include products made.

5. Variances that are favorable are recorded as

a. an increase to product costs
b. a decrease to product costs
c. no impact to product costs
d. an increase to cost of goods sold

Answer

B. A favorable variance means that actual costs were less than standard. Inventory accounts (product costs) are originally recorded at standard. The favorable variance decreases the standard cost to report the inventory costs at actual.

6. Variances that are unfavorable are recorded as

a. an increase to product costs
b. a decrease to product costs
c. no impact to product costs
d. a decrease to cost of goods sold

Answer

A. An unfavorable variance means that actual costs were more than standard. Inventory accounts (product costs) are originally recorded at standard. The unfavorable variance increases the standard cost to report the inventory costs at actual.

7. A significant unfavorable direct labor efficiency variance will

a. increase cost of goods sold
b. decrease cost of goods sold
c. increase raw materials
d. decrease raw materials

Answer

A. Unfavorable variances will increase cost of goods sold. Cost of goods sold is originally recorded at standard and when costs are actually higher (unfavorable), cost of goods sold is increased. The material price variance is the only variance that impacts raw materials (c. & d.).A.

8. The actual amount is always recorded with a

a. debit
b. credit
c. it varies depending on the type of inventory cost
d. debit for raw materials and credit for direct labor and overhead

Answer

B. The actual amount is always recorded with a credit. It is the amount that must be paid and is either a credit to cash or a liability.

9. The standard amount is always recorded with a

a. debit
b. credit
c. it varies depending on the type of inventory cost
d. debit for raw materials and credit for direct labor and overhead

Answer

A. The standard amount is always recorded with a debit when variances are recorded. An increase to inventory and cost of goods sold is always a debit. Inventory accounts are initially recorded at standard in a standard cost system.

10. A company records inventory at standard in order to

a. be able to compute variances
b. record cost of goods sold at the time of sale
c. record cost of goods sold at the end of the month
d. record more accurate inventory costs

Answer

B. Recording inventory at standard allows the company to record the cost of goods sold at the time the product is shipped to the customer. This is an estimated cost and is not as accurate as using actual costs (d.). At the end of the month, when actual costs are known, inventory and cost of goods sold are adjusted to actual. Variances can be computed regardless of what is recorded in the general ledger (a.). Companies recording cost of goods sold at the end of the month will wait and use actual costs when known.