Question

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 $1,152,000 of total manufacturing overhead for an estimated activity level of 72,000 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: 55,000 $ 1,102,000 Machine-hours Manufacturing overhead cost Inventories at year-end: Raw materials Work in process (includes overhead applied of $52, 800) Finished goods (includes overhead applied of $167,200) Cost of goods sold (includes overhead applied of $660,000) 18,000 114,600 362,900 $ 1,432,500 Required: 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. 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 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?

Answer 1

Solution = 1152000 = 72000 Estimated Total overheads (a) Estimated Machine hours (b) predetermined overhead Rate (alb) S per MH = 16 880000 Applied overheads [ 55000 MH X 16) Actual overheads underappled overheadę 1102000 273000 822000 Cost of goods sold Manufacturing overheadę |[ To record underappled overheads] 222000 Loverheads 53400 underappled Rallo x 222000 Allocation Work in process 6 % 2P2000 13320 167200 19% R22000 finished goods Cost of goods sold 4+2180 660000 75% २२२००० 166500 879600 222000 work in process Inventory finished goods Inventory Cost of goods sold Marufacturing overheads (To recold underappled overheads 13320 42180 166500 222000

Part 3 Part 4 166500 Difference 55500 222000 Cost of goods sold Income will be higher by 55500