Question

Problem 3-12 Predetermined Overhead Rate; Disposing of Underapplied or Overapplied Overhead [LO3-4]

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 $1,332,000 of total manufacturing overhead for an estimated activity level of 74,000 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		62,000
Manufacturing overhead cost	$	1,300,000
Inventories at year-end:
Raw materials	$	20,000
Work in process (includes overhead applied of $100,440)	$	176,400
Finished goods (includes overhead applied of $223,200)	$	392,000
Cost of goods sold (includes overhead applied of $792,360)	$	1,391,600

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	Compute the under applied or over applied overhead.
	the predetermined overhead rate is	Estimated total manufacturing overhead/Estimated total machine-hours
		=1,332,000/74,000
		18.00
	Actual manufacturing overhead cost	1,300,000
	Manufacturing overhead applied to work in process during the year	62,000*18 per hour
		1116000
	Under applied overhead cost	184,000

2	General Journal	Debit	Credit
	Cost of goods sold	184,000
	Manufacturing overhead		184,000

3
	Work in process 184000*9%	16560
	Finished goods 184000*20%	36800
	Cost of goods sold 184000*71%	130640
	Total	184000
	100,440	100440/1116000	9%
	223,200	223200/1116000	20%
	792,360	792360/1116000	71%
	1116000

General Journal	Debit	Credit
Work in process	16560
Finished goods	36800
Cost of goods sold	130640
Manufacturing overhead		184000

4	Cost of goods sold if the under applied overhead is closed directly to cost of goods sold
	1,391,600+184000	1575600
	Cost of goods sold if the under applied overhead is closed to Work in Process, Finished Goods, and Cost of Goods Sold
	1,391,600+130640	1522240
	Difference in cost of goods sold	53360