Genesis Corporation eliminates its overapplied or underapplied overhead by using the prorated method. For the year 2025, Genesis had the following balances:
- Cost of Goods Sold, $50,000
- Finished Goods Inventory, $20,000
- Work-in-Process Inventory, $30,000
- Actual Manufacturing Overhead, $70,000
- Applied Manufacturing Overhead, $60,000
After adjustment, what will be the impact on the account balances in Work-in-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold using the prorated method?

Question

Quizplus · Accepted Answer

The prorated method allocates the overapplied or underapplied overhead to the Work-in-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts based on their respective balances. In this case, Genesis has overapplied overhead by $10,000 ($70,000 - $60,000). This means that the actual overhead costs were less than the overhead costs that were applied to the products.To allocate the overapplied overhead, we need to calculate the overhead rate:Overhead rate = Actual Manufacturing Overhead / Total Manufacturing CostsTotal Manufacturing Costs = Cost of Goods Sold + Finished Goods Inventory + Work-in-Process InventoryTotal Manufacturing Costs = $50,000 + $20,000 + $30,000 = $100,000Overhead rate = $70,000 / $100,000 = 70%Now we can allocate the overapplied overhead to the three accounts:Work-in-Process Inventory: $30,000 x 70% = $21,000Finished Goods Inventory: $20,000 x 70% = $14,000Cost of Goods Sold: $50,000 x 70% = $35,000The overapplied overhead of $10,000 is allocated as follows:Work-in-Process Inventory: $21,000 - $18,000 = $3,000 increaseFinished Goods Inventory: $14,000 - $12,000 = $2,000 increaseCost of Goods Sold: $35,000 - $30,000 = $5,000 increase

Genesis Corporation Eliminates Its Overapplied or Underapplied Overhead by Using