Question

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 $765,000 of total manufacturing overhead for an estimated activity level of 85,000 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: Machine-hours Manufacturing overhead cost Inventories at year-end: 69,000 $ 719,000 Raw materials Work in process (includes overhead applied of $62,100) Finished goods (includes overhead applied of $105,570) $ 14,000 $ 183,000 $ 311,100 s 1,335,900 Cost of goods sold (includes overhead applied of $453,330) quired: 1. Compute the underapplied or overapplied overhead 2. Assume that the company closes any underapplied or overapplied overhead to Cost of Goods Sold. Prepare the appropriate journal entry. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 3. Assume that the company allocates any underapplied or over appliedoverhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. Prepare the appropriate journal entry. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 4. How much higher or lower will net operating income be if the underapplied or overapplied 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. Req 1 Req 2 Req 3 Req 4 Compute the underapplied or overapplied overhead

Answer 1

1)	computation of underapplied or overapplied overheads
	predetermined overhead rate = Total manufacturing overhead/machine hours
	=$765000/85000
	=$9
	Total manufacturing overheads cost actually incurred	$719,000
	(-) Total manufacturing overheads applied to work in process ( 9*69000)	$621,000
	Under applied manufacturing overhead	$98,000
2)	Journal entry
		Debit($)	Credit($)
	Cost of goods sold A/c	$98,000
	Manufacturing overheads A/c		$98,000
3)	If company applied under applied overheads proportionally to Work in process , Finished goods ,cost of goods sold.
		Amount($)	Percent(%)
	Work in process	62100	10
	Finished goods	105570	17
	cost of goods sold	453330	73
	Total	621000	100
	Journal entry
		Debit ($)	Credit ($)
	Work in process A/c (10% 0f 98000)	9800
	Finished goods A/c   (17% of 98000)	16660
	cost of goods sold A/c ( 73% of 98000)	71540
	Manufacturing overheads A/c		98000
4)
	Cost of goods sold if under applied overheads is charged directly to cost of goods sold ( $1335900 + $98000)	$1,433,900
	(-)Cost of goods sold if under applied overheads is allocated among Work in process, Finished good and cost of goods sold ( $ 1335900 + $71540)	$1,407,440
	Difference in cost of goods sold	$26,460
	Thus net operating income will be $ 26,460 higher if under applied overheads is allocated among work in process ,Finished good and cost of goods sold rather than directly to cost of goods sold.