Question

Which is NOT an acceptable method of disposing of variances?

closing them to cost of goods sold
closing them to raw materials, WIP, and finished goods
closing them to WIP, Finished goods, and cost of goods sold.
all are acceptable methods

Answer 1

In accounting, variances between standard costs and actual costs are typically disposed of by closing them to Cost of Goods Sold, WIP, and Finished Goods. Closing variances to raw materials alone is not an acceptable method.

Step-by-step explanation:

When dealing with accounting for manufacturing operations, management must decide how to handle any variances that arise between the standard costs and the actual costs incurred. There are several acceptable methods for disposing of variances at the end of an accounting period. These typically include:

• Closing them to the Cost of Goods Sold (COGS).
• Closing them to the individual accounts of Raw Materials, Work in Process (WIP), and Finished Goods.
• Closing them to a combination of WIP, Finished Goods, and COGS.

However, one method that is not considered acceptable is closing variances directly to raw materials only, because variances typically affect production stages beyond just the raw materials and include impacts on WIP, Finished Goods, and COGS.