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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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    Solution Preview

    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 ...

    Solution Summary

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