Which of the following is true concerning labor variances that are not material in amount? a. They are closed to Cost of Goods Sold. b. They are prorated among Work in Process, Finished Goods, and Cost of Goods Sold. c. They are prorated among Materials, Work in Process, Finished Goods, and Cost of Goods Sold. d. They are reported on the balance sheet at the end of the year. e. All of these.

The correct option is A

Explanation:

Variance is the amount obtained when actual cost is deducted from budgeted cost. Variance is calculated to find wether the cost is over applied or under applied.

In A the variances are closed to cost of goods sold if they are immaterial. It is an acceptable practice but only in case of immaterial labor variances.

A) They are closed to cost of goods sold.

Explanation:

Variances refer to the differences between actual and standard costs, also referred to as budgeted costs. In the case of labour variance also known as direct labour variance. Direct labour variance is a broad heading with two subheadings namely:- Labour rate variance and Efficiency variance. Under the Efficiency variance are the efficiency variance in active hours worked and the Idle Time variance. Labour variance is applied in two ways:-

1) If immaterial, it is disposed to cost of goods sold

2) If material, it is disposed amongst work in progress inventory, finished goods inventory and cost of goods sold.

When a variance is immaterial, it simply means it is assigned to cost of goods sold. This is illustrated as expensing the cost of a car in the period it was bought rather than assigning its cost over the life of the car through depreciation.

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