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Disposition of Year-End Underapplied Overhead

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Liz's Cosmetics uses a normal cost system and has the following balances at the end of its first year operations.

WIP inventory: $200,000
Finished-goods inventory: 200,000
Cost of goods sold: 400,000
Actual Factory overhead: 413,000
Factory overhead applied: 453,000

Compute cost of goods sold for 2 different ways to dispose of the year-end overhead balances. By how much would gross profit differ?

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The solution explains the disposition of year-end underapplied overhead.

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Actual overhead is 413,000 and applied is 453,000. This implies overhead is over applied by $40,000 and there will be a credit balance of $40,000 in the overhead account.

1. In the first method, the total amount of over applied overhead is closed to the cost ...

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