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To determine the gross profit before and after closing the Manufacturing Overhead account, we must analyze the journal entries and compute:
Total production cost (Cost of Goods Manufactured, or COGM)
Gross profit = Sales Revenue − COGS
Impact of closing overhead account
Step 1: Identify and sum all costs recorded in Work in Process (WIP):
From journal entries:
Direct materials added to WIP:WIP Dr 19 (from: Materials Cr 19)
Direct labor added to WIP:WIP Dr 26 (from: Wages Payable Cr 26)
Manufacturing overhead applied to WIP:WIP Dr 30 (from: Manufacturing Overhead Cr 30)
Total product cost (COGM):
= 19 (materials) + 26 (labor) + 30 (overhead applied)
= $75
Step 2: Record transfer to Finished Goods and then to COGS:
WIP Cr 75 → Finished Goods Dr 75
Then, Finished Goods Cr 75 → COGS Dr 75 (once sold)
Step 3: Calculate gross profit before closing overhead:
Step 4: Check the Manufacturing Overhead account:
From journal entries:
Overhead actual incurred:Manufacturing Overhead Dr 31 (from Materials 10 and Wages Payable 21)
Overhead applied to WIP:Manufacturing Overhead Cr 30
Remaining balance in overhead account:
= 31 (debits) − 30 (credits) = 1 (debit balance → underapplied overhead)
Since the underapplied overhead is considered immaterial, it is closed to COGS:
New COGS = $75 (original) + $1 (underapplied) = $76
New Gross Profit = $150 − $76 = $74
Thus:
Gross profit before closing overhead: $75
Gross profit after closing overhead: $74→ Decreased by $1
However, this matches the description in option A (Gross profit was $44; decreased by $1). Wait — there's a conflict here.
Let’s double-check.
The gross profit we calculated is $75, not $44.
Let’s test the logic again.
WIP includes:
Materials: 19
Labor: 26
Overhead: 30→ Total = 75
Sale = $150
→ Gross profit = $150 − $75 = $75
Underapplied overhead = $1 → added to COGS
New gross profit = $74
So the answer should say: Gross profit was $75; decreased by $1 → that would match option C.
But option C says: Gross profit was $75; gross profit decreased by $1.00 after closing manufacturing overhead. That matches our calculation.
So, correct answer: C
CORRECTION: The earlier answer marked as A was misaligned with the actual computed values. Based on this revised and verified calculation:
Answer: C
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Final Calculations Summary:
Direct Materials: $19
Direct Labor: $26
Applied Overhead: $30
Total Cost (COGS before adjustment): $75
Revenue: $150
Gross Profit (before adjustment): $75
Overhead underapplied by $1 → Increases COGS to $76
Gross Profit (after adjustment): $74
Gross Profit Decreased by $1.00 after closing overhead
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[References:, Saylor Academy, BUS105: Managerial AccountingUnit 3.5 – Applying Overhead and Calculating Product Costhttps://learn.saylor.org/mod/book/view.php?id=28817&chapterid=6700, Also see Unit 4.4 – Overapplied and Underapplied Overheadhttps://learn.saylor.org/mod/book/view.php?id=28818&chapterid=6708, ]