Question

The actual manufacturing overhead incurred at Liberty Industries during May was $59.000, while the manufacturing overhead applied to Work-in-Process was $74,000. The company's Cost of Goods Sold was $289,000 prior to closing out its Manufacturing Overhead account. The company closes out its Manufacturing Overhead account to cost of Goods Sold. Which of the following statements is true? Multiple Choice Manufacturing overhead was underapplied by $15.000: Cost of Goods Sold after closing out the Manufacturing Overhead account is $274,000. Manufacturing overhead was overapplied by $15,000: Cost of Goods Sold after closing out the Manufacturing Overhead account is $304.000. Manufacturing overhead was overapplied by $15,000: Cost of Goods Sold after closing out the Manufacturing Overhead account is $274.000. Manufacturing overhead was underapplied by $15.000: Cost of Goods Sold after closing out the Manufacturing Overhead account is $304,000.

Answer 1

Ans C Manufacturing overhead was applied by $15000, cost of goods sold after closing out the manufacturing overhead account is $274000

Reason and Explanation is as follows

In the given case manufacturing overhead was over applied by $15000 applied over head ($74000) was greater than actual over head ($59000)

so entry would be

manufacturing Over head A/c Dr $15000

To COGS A/c CR $15000

explanation why cost of goods sold is credited

The overhead cost applied ($74000) to the jobs was too high—it was overapplied( by $15000). Thus, the cost of jobs was overstated or we charged to much cost to jobs. Although those jobs are still in Work in Process or Finished Goods Inventory, organisations generally adjust the COGS instead of each inventory account, hence it has to be reduced to nullify the effect of excess applied over head .

hence COGS which is maintaining balance prior to closing out its manufacturing account is $289000 and so from above entry it would be reduced to the extent of $15000 hence cost of ggods sold after closing out its manufacturing overhead account was $274000($289000-$15000)