Garcia Company uses the direct write-off method to eliminate its under-applied overhead. Assume that Garcia incurred actual overhead costs, totaling $85,000 and applied overhead costs of $80,000. Unfortunately, at year-end, Garcia's chief cost accountant inadvertently forgot to adjust Cost of Goods Sold for the required adjustment amount. What effect will this error have on Garcia's Cost of Goods Sold and Gross Margin?

Question

Quizplus · Accepted Answer

$85,000, Actual MOH - $80,000, Applied MOH = $5,000 under-applied overhead. The adjustment to Cost of Goods Sold should have increased Cost of Goods Sold by $5,000 and correspondingly, decreased Gross Margin by this same amount.

Garcia Company Uses the Direct Write-Off Method to Eliminate Its