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 $560,000 of total manufacturing overhead for an estimated activity level of 70,000 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: 61,000 514,000 ♡ $ Machine-hours Manufacturing overhead cost Inventories at year-end: Raw materials Work in process (includes overhead applied of $48,800) Finished goods (includes overhead applied of $92,720) Cost of goods sold (includes overhead applied of $346,480) $ 14,000 $ 188,000 $ 357,200 $ 1,334,800 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

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Solution: Predetermined overhead rate (560000/70000) = $ 8 Actual overhead Less: Applied overhead (61000+8) Underapplied overhead 514000 488000 26000 Credit Note: Ignore the order of commas in amount: Date Account title and explaination Cost of goods sold Manufacturing overhead (To close the underapplied overhead to COGS) Debit 26000 26000 3) Date Credit Account title and explaination Work in process (188000/1880000)*26000 Finished goods (357200/1880000)*26000 Cost of goods sold (1334800/1880000)*26000 Manufacturing overhead (To close the underapplied overhead) $ $ $ Debit 2,600 4,940 18,460 26000 4) Net Operating income will be "Higher" by (26000-18460) = $ 7,540