MacLachlan Manufacturing had underapplied overhead of €40,000 in 20X0. Before adjusting for overapplied or underapplied overhead, the ending inventories for direct materials, WIP and finished goods were €75,000, €150,000 and €100,000, respectively. Unadjusted cost of goods sold was €250,000.
1. Assume that the €40,000 was written off solely as an adjustment to cost of goods sold. Compute the adjusted cost of goods sold.
2. Management has decided to prorate the €40,000 to the appropriate accounts (using the unadjusted ending balances) instead of writing it off solely as an adjustment of cost of goods sold. Would gross profit be higher or lower than in requirement 1? By how much?