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 $1,332,000 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: 62,000 $ 1,300,000 Machine-hours Manufacturing overhead cost Inventories at year-end: Raw materials Work in process (includes overhead applied of $100,440) Finished goods (includes overhead applied of $223,200) Cost of goods sold (includes overhead applied of $792,360) $ 20,000 $ 176,400 $ 392,000 $ 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

Solution 1:

Predetermined overhead rate = $1332000/ 74000 = $18 per machine hour

Applied overhead = $18*62000 = $1,116,000

Underapplied overhead = actula overhead - apllied overhead = $1300000 - $1116000 = $184,000

Solution 2 and 3:

F 1 2 Credit Debit $184,000 solution 2: Account Title Cost of goods sold Manufacturing overhead (To record adjusting journal entry to close the overhead variance to Cost of Goods Sold) $184,000 00 Cost 9% Solution 3: Proportion of variance Work in Process Inventory Finished Goods Inventory Cost of Goods sold Total 11 12 13 14 Proportion 100440 223200 20% 792360 71% 1116000 15 Credit 16 Account Title Work in Process Inventory (184000*9%) Finished Goods Inventory (184000* 20%) Cost of Goods Sold (184000*71%) To Manufacturing Overhead Debit $16,560 $36,800 $130,640 19 $184,000 20 21 22 23 | 24 25 26 27 28 29 30 31 32 33 34 35 36 37 -100 (2) ) Sheet346 Sheet348 ) Sheet310 Sheet317

Solution 4:

Cost of goods sold will decrease by = $184000 - $130640 = $53,360

Therefore,

Net olerating income will be increased by $53,660.