When an appropriately established and effective standard cost system is used to value inventory:
A) cumulative variances are deferred.
B) a significant unfavorable net variance may be reported as an expense of the current period.
C) a significant favorable net variance may be reported as an expense of the current period.
D)the explanatory notes to the financial statements will explain the disposition of the net variance.

Question

Quizplus · Accepted Answer

A significant unfavorable net variance may be reported as an expense of the current period when using an appropriately established and effective standard cost system to value inventory. This is because the standard cost system assumes that production costs will remain constant, so any deviations from the standard cost are considered variances and may result in expenses or income in the current period. Cumulative variances are not deferred in this system, as they are constantly monitored and adjusted for. The explanatory notes to the financial statements should still explain the disposition of the net variance, but this is not the best choice.

When an Appropriately Established and Effective Standard Cost System Is