Year-end accrual of factory rent charges P&L directly without altering production costs

Steps:

• Recognize owed factory rent as an accrued indirect expense for the period.
• Confirm prime cost (direct materials + direct labor + direct expenses) excludes indirect costs like rent, so no effect.
• Note cost of production uses predetermined absorbed overheads; year-end actual accruals adjust P&L separately, no change to production cost.
• Observe increased expense reduces overall profit, specifically decreasing gross profit (sales - COGS) via P&L adjustment.

Why B is correct:

• Factory rent accrual increases period expenses in P&L without reopening absorbed cost of production, directly lowering gross profit per standard manufacturing accounting.

Why the others are wrong:

• A: Cost of production neither decreases nor causes gross profit to increase; expense accrual raises costs.
• C: Cost of production unaffected, as adjustment bypasses absorbed overhead calculation.
• D: Prime cost excludes indirect rent, so it does not increase.

Final answer: B