Question

If the net of all variances is immaterial relative to the total production costs incurred during the period, the net variance is:

1) treated as an adjustment to cost of goods sold.
2) ignored.
3) treated as an adjustment to work in process, finished goods, and cost of goods sold.
4) treated as an adjustment to manufacturing overhead.

Answer 1

In cost management, especially in manufacturing, businesses analyze variances between expected and actual production costs. When the net variance is immaterial to the total production costs, it is commonly adjusted against the cost of goods sold. The correct answer to the question is that the net variance is treated as an adjustment to cost of goods sold (option 1).

Step-by-step explanation:

Cost management is a crucial aspect of business operations, especially in the manufacturing sector where a firm's total costs are divided into fixed costs and variable costs. Fixed costs are considered sunk costs and should not affect future economic decisions since they cannot be altered once incurred. On the other hand, variable costs are directly associated with production levels, showing diminishing marginal returns, which suggests that the cost of producing additional units increases with higher levels of production. Therefore, businesses closely monitor and analyze cost variances during a production period.

When it comes to handling the net variance in costs that is immaterial relative to the total production costs incurred during the period, different accounting practices may be applied based on materiality and judgement. However, the common practice is to treat the immaterial net variance as an adjustment to the cost of goods sold, work in process, finished goods, or manufacturing overhead, depending on the nature of the variance and the company's policies. If the net of all variances is immaterial, the preferred approach is often to:

1. Treat as an adjustment to cost of goods sold.

2. Ignore.

3. Treat as an adjustment to work in process, finished goods, and cost of goods sold.

4. Treat as an adjustment to manufacturing overhead.

In conclusion, if the net of all variances is immaterial relative to the total production costs, the standard practice is to treat it as an adjustment to cost of goods sold, matching the expense with the revenue it helped to generate. Hence, the correct option in the final answer is option (1).