Question

Atlas Corp. had $390,000 of actual factory overhead and $355,000 of applied overhead. Their Direct Material, WIP, Finished Goods, COGS, and Gross Profit had the following balances: $400,000, $200,000, $300,000, $500,000 and $250,000 respectively.

-Use the pro-rated methodology to dispose of the variance.

- What is the adjusted COGS and gross profit after accounting for the variance.

Answer 1

Calculation of Under applied overheads

= actual factory overhead - applied overhead

= $390,000 - $355,000

= $35,000

Calculation of pro rata basis for disposing of variance:

= Under Applied Overheads / (  WIP + Finished Goods + COGS)

= $35,000 / ( $200,000 + $300,000 + $500,000)

= $35,000 / $1,000,000

= .035

Therefore, $35,000 under applied Overheads will be disposed off to:

WIP = .035 * $200,000 = $7,000

Finished Goods = .035 * $300,000 = $10,500

COGS = .035 * $500,000 = $17,500

Adjusted COGS = $500,000 + $17,500 = $517,500

Increase in COGS decreases the gross profit while increase in WIP and Finished goods increases the gross profit for the current year but reduces the profit in next period.

Therefore, adjusted gross profit = $250,000 + $10,500 + $7,500 - $17,500 = $250,000