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Before prorating overhead, the current period overhead component of Cost of Goods Sold for Wilmington Company was $230,000, while the current period overhead component of the ending inventory was $80,000. Manufacturing overhead of $310,000 was applied during the period, whereas $296,000 was actually incurred. Wilmington has no Work-in-Process inventory at the end of the period.
-By how much will Wilmington Company's operating income differ if the manufacturing-overhead variance is closed to Cost of Goods Sold instead of prorated between inventory and cost of goods sold?
A) $14,000 higher
B) $3,613 lower
C) $3,613 higher
D) $11,188 lower

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Quizplus · Accepted Answer

The manufacturing overhead variance is $14,000 ($310,000 applied - $296,000 actually incurred), indicating overhead was overapplied. If this variance is closed to Cost of Goods Sold, the Cost of Goods Sold will decrease by $14,000, making operating income $14,000 higher. However, if prorated based on the overhead component (totaling $310,000) in Cost of Goods Sold ($230,000) and ending inventory ($80,000), the share of the variance allocated to Cost of Goods Sold is ($230,000 / $310,000) * $14,000 = $10,387, and to ending inventory is ($80,000 / $310,000) * $14,000 = $3,613. Closing to Cost of Goods Sold directly increases operating income by $14,000, but prorating and then closing the portion related to Cost of Goods Sold increases it by only $10,387, making the difference $3,613 lower than if the entire variance were closed to Cost of Goods Sold directly.

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