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8. Lucas Enterprises has no work-in-process or finished goods inventories at year-end. The balances of Lucas\' accounts includes the following: Cost of goods sold General selling and administrative expenses Sales $2,040,000 900,000 3,600,000 Lucas has incurred actual manufacturing overhead cost of $700,000 and applied $690,000 of manufacturing overhead during the year. Lucas closes any over (under)- applied manufacturi overhead directly to cost of goods sold. After closing out over (under)- applied manufacturin overhead, Lucas\' operating profit before taxes for the year is: A) $712,000 B) $670,000 C) $650,000 D) $1,508,000 E) None of the above.

Solution

Calculation of Lucas operating profit before taxes for the year Sales $3,600,000 Less : Cost of goods sold (adjusted) $2,050,000 Gross Margin $1,550,000 Less : General selling and administrative expenses $900,000 Operating profit before taxes $650,000 The answer is Option C. Working : Underapplied overheads = Actual manufacturing overheads - Applied manufacturing overheads = $700000 - $690000 = $10000 Cost of goods sold (adjusted) = Cost of goods sold (unadjusted) + underapplied overheads = $20,40,000 + $10000 = $20,50,000