Alpine Productions uses a standard cost system for recording transactions. Alpine reported the following data for the year ended December 31: Sales revenues: $700,000
Cost of goods sold (standard costing): $382,500
Selling & administrative expenses: $100,000
Variances:
$$\begin{array} { | l | r | c | }
\hline \text { Sales revenue variance } & \$ 4100 & \mathrm {~F} \
\hline \text { Direct materials cost variance } & 20 & \mathrm { U } \
\hline \text { Direct materials efficiency variance } & 325 & \mathrm {~F} \
\hline \text { Direct labor cost variance } & 75 & \mathrm { U } \
\hline \text { Direct labor efficiency variance } & 10 & \mathrm {~F} \
\hline \text { Variable overhead cost variance } & 300 & \mathrm { U } \
\hline \text { Variable overhead efficiency variance } & 80 & \mathrm {~F} \
\hline \text { Fixed overhead cost variance } & 410 & \mathrm { U } \
\hline \text { Fixed overhead volume variance } & 130 & \mathrm {~F} \
\hline
\end{array}$$ What is the net operating income on a standard cost income statement?
A) $217,240
B) $221,340
C) $321,340
D) $217,500

Question

Alpine Productions uses a standard cost system for recording transactions. Alpine reported the following data for the year ended December 31: Sales revenues: $700,000
Cost of goods sold (standard costing): $382,500
Selling & administrative expenses: $100,000
Variances:
$$\begin{array} { | l | r | c | } 
\hline \text { Sales revenue variance } & \$ 4100 & \mathrm {~F} \
\hline \text { Direct materials cost variance } & 20 & \mathrm { U } \
\hline \text { Direct materials efficiency variance } & 325 & \mathrm {~F} \
\hline \text { Direct labor cost variance } & 75 & \mathrm { U } \
\hline \text { Direct labor efficiency variance } & 10 & \mathrm {~F} \
\hline \text { Variable overhead cost variance } & 300 & \mathrm { U } \
\hline \text { Variable overhead efficiency variance } & 80 & \mathrm {~F} \
\hline \text { Fixed overhead cost variance } & 410 & \mathrm { U } \
\hline \text { Fixed overhead volume variance } & 130 & \mathrm {~F} \
\hline
\end{array}$$ What is the net operating income on a standard cost income statement?
A) $217,240
B) $221,340
C) $321,340
D) $217,500

Quizplus · Accepted Answer

Standard cost income statement= Actual Sales revenue - Actual COS (based on standard costing) - Actual Selling and administrative expenses.
Net Operating Income= $700,000 - $382,500 - $100,000 = $217,500
Since we have variances, we need to adjust the actual costs with the variances to get the standard costs. If we assume that the variances are unfavorable, we need to add them to the actual costs. Let's say the variances are $4,000, then the adjusted COS would be $386,500
Standard cost income statement= Actual Sales revenue - Adjusted COS (incorporating variances) - Actual Selling and administrative expenses
Net Operating Income= $700,000 - $386,500 - $100,000 = $213,500
We have to remember that the standard cost system assumes a set of predetermined costs, and the variances arise when the actual costs differ from the standard costs. The unfavorable variances decrease the net operating income for the year. 
Here, the answer that represents the net operating income after adjusting costs based on variances is $221,340, which is option B.

Alpine Productions Uses a Standard Cost System for Recording Transactions