Question

PROBLEM 3-12 Predetermined Overhead Rate; Disposing of Underapplied or Overapplied Overhead LO3-4 I uzadis 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 $900.000 of total manufacturing overhead for an estimated activity level of 75,000 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: 60,000 $850,000 Machine-hours ... Manufacturing overhead cost .. Inventories at year-end: Raw materials .................... Work in process (includes overhead applied of $36,000) Finished goods (includes overhead applied of $180,000)....... Cost of goods sold includes overhead applied of $504,000)...... $30,000 $100,000 $500,000 $1,400,000 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.
Underapplied or overapplied overhead	Actual overhead - Applied overhead
Predetermined overhead rate	900000/75000
Predetermined overhead rate	$12.00
Overhead applied	$720,000	60000*12
Underapplied or overapplied overhead	850,000-720,000
Underapplied overhead	$130,000
2
Journal entry to record close underapplied overhead to cost of goods sold
General Journal	Debit	Credit
Cost of goods sold	$130,000
Manufacturing overhead		$130,000
(To record underapplied overhead close to COGS)
3	Overhead applied			Amount of underapplied close
Work in process	$36,000	5.00%	36000/720000	$6,500	130000*5%
Finished goods	$180,000	25.00%	180000/720000	$32,500	180000*25%
Cost of goods sold	$504,000	70.00%	504000/720000	$91,000	180000*70%
	$720,000
Journal entry to close underapplied overhead
General Journal	Debit	Credit
Work in process inventory	$6,500
Finished goods inventory	$32,500
Cost of goods sold	$91,000
Manufacturing overhead		$130,000
(To record underapplied overhead close)
4
Net operating income would be higher if underapplied overhead is allocated to WIP, FG and cost of goods sold rather than only cost of goods sold
Net operating income would be higher by	$39,000	130000-91000