A company uses perpetual inventory and produces items In-house that are controlled by the standard cost valuation method The standard cost value is set to 20 During the past month, the actual cost…

Question

Options

• AThe cost difference 5 is posted to a variance account.
• BThe cost of goods sold for the item will be set at 25.
• CThe cost of 25 is posted to the stock account.
• DA cost of 20 is posted to the stock account.

• A
  82% (37)
• B
  13% (6)
• C
  4% (2)

Explanation

Under the standard cost method, inventory is always valued at the predetermined standard cost (20), regardless of what it actually costs to produce - so D is correct because each production entry posts 20 to the stock (inventory) account. Since the actual production cost was 25, the 5 difference cannot simply disappear; it must be captured in a production variance account, making A correct as well.

B is wrong because cost of goods sold is driven by the standard cost (20) when the item leaves inventory, not the actual production cost of 25 - the variance was already captured at production time, not at sale. C is wrong for the same core reason: the stock account always reflects the standard cost (20), never the actual cost (25); posting 25 to stock would defeat the purpose of standard costing entirely.

Memory tip: Think of it as a two-bucket rule - standard cost fills the stock bucket, the gap fills the variance bucket. If actual > standard, you debit the variance account for the difference; inventory never "sees" the actual cost.

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