In the Vasquez Company, any over- or underapplied overhead is closed out to Cost of Goods Sold. Last year, the company incurred $27,000 in actual manufacturing overhead cost, and applied $29,000 of overhead cost to jobs. The beginning and ending balances of Finished Goods were equal, and the Company”s Cost of Goods Manufactured for the year totaled $71,000. Given this information, Cost of Goods Sold, after adjustment for any over- or underapplied overhead, for the year must have been:
A) $98,000
B) $73,000
C) $71,000
D) $69,000
The Correct Answer and Explanation is :
The correct answer is D) $69,000.
Explanation:
In order to calculate the adjusted Cost of Goods Sold (COGS), we need to account for any over- or underapplied manufacturing overhead. The company applies overhead to jobs based on a predetermined rate, and any difference between the actual overhead incurred and the overhead applied to jobs needs to be closed out to COGS.
Step 1: Determine the over- or underapplied overhead.
We are told that:
- Actual Manufacturing Overhead = $27,000
- Applied Manufacturing Overhead = $29,000
To find whether the company has overapplied or underapplied overhead, we subtract the actual from the applied:
[
\text{Over- or Underapplied Overhead} = \text{Applied Overhead} – \text{Actual Overhead} = 29,000 – 27,000 = 2,000
]
Since the applied overhead is higher than the actual overhead, this means the company has overapplied its overhead by $2,000.
Step 2: Adjust COGS.
According to the information provided, any overapplied or underapplied overhead is closed out to Cost of Goods Sold. Since the company has overapplied its overhead by $2,000, the COGS must be reduced by that amount.
We are also told that the Cost of Goods Manufactured (COGM) for the year is $71,000. Since the beginning and ending balances of Finished Goods are the same, the COGS before the adjustment is equal to the COGM.
Thus, the unadjusted COGS is $71,000.
Now, we adjust the COGS for the overapplied overhead:
[
\text{Adjusted COGS} = \text{Unadjusted COGS} – \text{Overapplied Overhead}
]
[
\text{Adjusted COGS} = 71,000 – 2,000 = 69,000
]
Therefore, the adjusted Cost of Goods Sold for the year is $69,000.
Thus, the correct answer is D) $69,000.