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 $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. 64,000 471,000 Machine-hours Manufacturing overhead cost Inventories at year-endi Raw materials Work in process (includes overhead applied of $64,000) Finished goods (includes overhead applied of $204, 800) Cost of goods sold includes overhead applied of $1,011,200) 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 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

1) Overhead rate = 1520000/76000 = 20 per hour

Overhead applied = 64000*20 = 1280000

Actual overhead = 1471000

Under applied overhead = 1471000-1280000 = 191000

2) Journal entry

Date	account and explanation	Debit	Credit
	Cost of goods sold	191000
	Manufacturing overhead		191000
	(To record under applied overhead)

3) Journal entry

Date	account and explanation	Debit	Credit
	Work in process (191000*5%)	9550
	Finished goods	30560
	Cost of goods sold	150890
	Manufacturing overhead		191000
	(To record under applied overhead)

4) Net income will be higher by (9550+30560) = 40110 if under applied Overhead is allocated rather than closed entirely to cost of goods sold