O Level Accounting (7707)•7707/12/M/J/24
Explanation
Omission of WIP adjustment understates production costs
Steps:
- Opening WIP ($600) should be added to manufacturing costs; omitting it reduces total costs.
- Closing WIP ($1100) should be subtracted from manufacturing costs; omitting it further reduces total costs.
- Net effect: cost of production understated by 1100 = $500.
- Lower cost of production increases gross profit (sales minus understated costs).
Why B is correct:
- Manufacturing cost formula is opening WIP + production costs - closing WIP; forgetting adjustment (net subtract $500) understates costs, overstating gross profit per profit calculation.
Why the others are wrong:
- A: Omission reduces costs (understates), not overstates them or profit.
- C: Understated costs overstate gross profit, not understate it.
- D: Identical to B, but B is specified as correct.
Final answer: B
Topic: Manufacturing accounts
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