Question

Dawn Corp. uses a standard cost system. During the year, both the labor rate variance and the labor efficiency variance were unfavorable. Dawn wrote the variances off directly to cost of goods sold. If Dawn had allocated the variances to work in process, finished goods, and cost of goods sold instead, what would have been the effects on current ratio and net income?Current--------- Netratio -----------incomeA. Increases ----IncreasesB. Increases ----DecreasesC. Decreases --IncreasesD. Decreases-- Decreases

Answer 1

Answer:

Option A is the correct answer (Increases - Increases)

Explanation:

If Dawn had allocated the variances to work in progress rather than on cost of goods sold. Current ratio would increases and the net income would increase also. This is because writing off the variances to cost of goods sold would automatically result into a lower operating income than if it was either prorated to work in progress, finished goods, and cost of goods sold.