Question

Some accountants would argue that any variances from standard costs, when such standards are current, should be written off to Cost of Goods Sold (or other income statement account). The principal conceptual rationale for this treatment is:

Multiple Choice:
(A) This is the treatment required currently under generally accepted accounting principles in the U.S.
(B) To allocate such variances (as the alternative treatment) implies that asset values on the balance sheet (i.e., inventories) contain the cost of inefficiencies
(C.) The negligible effect this treatment has on total Cost of Goods Sold (or the Income Statement) for the period.
(D) The increased information and insight this procedure provides to management, for better managing operations.
(E.) Simplicity of application—this is an expedient method.

Answer 1

The principal rationale for writing off variances from standard costs to Cost of Goods Sold is to prevent asset values from including the cost of inefficiencies, which could inflate inventory values on the balance sheet.

Step-by-step explanation:

The student's question pertains to why some accountants believe variances from standard costs should be written off to Cost of Goods Sold or another income statement account when such standards are current. The option that represents the principal conceptual rationale for this treatment is (B) To allocate such variances implies that asset values on the balance sheet (i.e., inventories) contain the cost of inefficiencies.

The rationale behind this choice is related to the accurate portrayal of asset values. If variances are not written off, inventories could potentially be inflated due to included costs that actually reflect inefficiency rather than the actual cost to produce the product. Writing off variances to the income statement ensures that reported asset values do not carry forward inefficiencies as part of their value.