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Problem 3-12 Predetermined Overhead Rate; Disposing of Underapplied or Overapplied Overhead (LO3- Luzadis Company makes furniture using the latest automated technology. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of machine-hours. The predetermined overhead rate was based on a cost formula that estimates $1,520,000 of total manufacturing overhead for an estimated activity level of 76,000 machine-hours. During the year, a large quantity of furniture on the market resulted in cutting back production and a buildup of furniture in the company's warehouse. The company's cost records revealed the following actual cost and operating data for the year $ 64.000 1,471,000 Machine-hours Manufacturing overhead cost Inventories at year-end: Raw Baterials Work in process (includes overhead applied of 164,000) Finished goods (includes overhead applied of 5204,800) Cost of goods sold (includes overhead applied of 51,011,200) 14,000 90,500 289,600 1,429,900 $ $ Required: 1. Compute the underapplied or overapplied overhead. 2. Assume that the company closes any underapplied or overapolied overhead to Cost of Goods Sold. Prepare the appropriate journal entry 3. Assume that the company allocates any underapplied or overapplied overhead proportionally to Work in Process, Finished Goods and Cost of Goods Sold Prepare the appropriate journal entry 4 How much higher or lower wil net operating income be the underapplied or over applied overhead is allocated to Work in Process Finished Goods, and Cost of Goods Sold rather than being closed to Cost of Goods Sold? Complete this question by entering your answers in the tabs below. Compute the underapplied or overapplied overhead Required 2 >

Answer 1

Required 1 :
Predetermined overhead rate = Estimated manufacturing overhead / Estimated machine hours = 1520000 / 76000	20
Manufacturing Overhead applied = Actual machine hours * Predetermined overhead rate = 64000 * 20	1280000
Actual manufacturing overhead cost	1471000
As the manufacturing overhead applied is less than the actual manufacturing cost, the overhead is underapplied by 191000 ( i.e. 1471000 - 1280000 )

Underapplied overhead cost

191000

Required 2 :
	Debit	Credit
Cost of goods sold	191000
Manufacturing overhead		191000

Required 3 :
	Debit	Credit
Work in process ( 191000 * 64000 / 1280000 )	9550
Finished goods ( 191000 * 204800 / 1280000 )	30560
Cost of goods sold ( 191000 * 1011200 / 1280000 )	150890
Manufacturing overhead		191000

Required 4 :

The net operating income will be 40110 greater if the underapplied overhead is allocated rather than closed entirely to cost of goods sold.

Reason : Because the cost of goods sold in the allocation method will be lower by 40110 [ i.e. 191000 - 150890 ] than the cost of goods sold when the entire underapplied is closed to cost of goods sold.