The initial gross profit is calculated as Sales Revenue minus the Cost of Goods Sold (COGS). The total cost of Job #3, which becomes COGS upon sale, is the sum of direct materials ($30), direct labor ($25), and applied manufacturing overhead ($50), totaling $105. This would result in a gross profit of $45 ($150 - $105). However, this is not an option. The question's options imply a COGS of $75 (Direct Labor $25 + Applied Overhead $50), leading to a Gross Profit of $75 ($150 - $75).

To determine the effect of closing the overhead account, compare actual vs. applied overhead. Actual overhead was $51, and applied overhead was $50. This results in a $1 underapplied overhead balance. Closing an immaterial underapplied balance involves debiting COGS and crediting Manufacturing Overhead. This entry increases COGS by $1, which in turn decreases gross profit by $1.

A. The initial gross profit calculation is incorrect. While the effect on gross profit is correctly identified as a decrease, the starting value is wrong.

B. Both the initial gross profit calculation and the effect of closing overhead (stated as an increase) are incorrect. Underapplied overhead decreases profit.

D. The effect of closing underapplied overhead is a decrease in gross profit, not an increase, because it increases the Cost of Goods Sold.

1. Heisinger, K., & Hoyle, J. B. (n.d.). Managerial Accounting. University of Minnesota Libraries Publishing.

Chapter 2, Section 2.4 "A Job Costing Example": This section details how the cost of a job (and thus COGS) is the sum of direct materials, direct labor, and manufacturing overhead applied. Gross profit is sales less COGS.

Chapter 2, Section 2.5 "Closing the Manufacturing Overhead Account": This section explains that when actual overhead is greater than applied overhead, the balance is called underapplied overhead. Closing this amount to COGS increases the COGS balance and decreases net income (and gross profit).

2. Walther, L. M. & Skousen, C. J. (2009). Managerial and Cost Accounting. Bookboon.com.

Chapter 3, "Job Costing and Modern Cost Management Systems", p. 30: This chapter illustrates the flow of costs in a job costing system, where Work in Process includes direct material, direct labor, and applied overhead.

Chapter 3, p. 36, "Disposition of Under- and Overapplied Overhead": This section clarifies that an immaterial amount of underapplied overhead is typically closed to Cost of Goods Sold, increasing its balance.