Question

Actual manufacturing overhead was $50,000, while overhead applied to jobs was $45,000. Work in process contained 10% of applied overhead, Finished goods contained 40%, and Cost of goods sold contained 50%. Assuming the company uses the proration method to dispose of over and under applied overhead, cost of goods sold will be Blank______.

Multiple select question.

increased by $5,000


increased by $2,500


decreased by $2,500


decreased by $5,000

Answer 1

To determine how cost of goods sold (COGS) will be adjusted when using the proration method for disposing of under-applied overhead, we'll first identify the amount of under-applied overhead and then allocate it according to the proportions given.

1. **Calculate Under-applied Overhead:**
- Actual manufacturing overhead: $50,000
- Applied overhead: $45,000
- Under-applied overhead = Actual overhead - Applied overhead = $50,000 - $45,000 = $5,000

2. **Determine Allocation Based on Percentages:**
- Work in process (WIP): 10% of applied overhead
- Finished goods (FG): 40% of applied overhead
- Cost of goods sold (COGS): 50% of applied overhead

Since we're using the percentages of how applied overhead is allocated:
- WIP = 10% of $45,000 = $4,500
- FG = 40% of $45,000 = $18,000
- COGS = 50% of $45,000 = $22,500

3. **Calculate the proration amounts:**
- Total applied overhead = $45,000
- Total allocation percentage = 100%
- Proration to COGS = (COGS portion of overhead / Total applied overhead) * Under-applied overhead
- Proration to COGS = ($22,500 / $45,000) * $5,000
- Proration to COGS = 0.5 * $5,000 = $2,500

4. **Adjust COGS:**
Since this is under-applied overhead, COGS will increase by the proration amount:
- COGS will increase by $2,500.

### Conclusion
Therefore, the answer is:
- **increased by $2,500**