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 $592,000 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 bulldup of furniture in the company's warehouse. The company's cost records revealed the following actual cost and operating data for the year. $ 67,000 551,000 Machine-hours Manufacturing overhead cost Inventories at year-end: Raw materials Work in process (includes overhead applied of $37,520) Finished goods (includes overhead applied of $101,840) Cost of goods sold (includes overhead applied of $396,640) $ 13,000 $ 139,300 $ 378,100 $1,472,600 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 3. Assume that the company allocates any underapplied or over appliedoverhead proportionally to Work In Process, Finished Goods, and Cost of Goods Sold. Prepare the appropriate journal entry. (If no entry is required for a transaction/event, select "No journal entry required in the first account field.) 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? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Req3 Reg 4 Compute the underapplied or overapplied overhead Reg1 Req2 >

Answer 1

Solution 1:

predetermined overhead rate = $592000 / 74000 = $8 per machine hour

Applied overhead = $8 *67000 = $536,000

Underapplied Overhead = Actual Overhead cost - Applied overhead = $551000 - $536000 = $15,000

Solution 2:

Account Title	Debit	Credit
Cost of Goods Sold Dr	$15,000
To Manufacturing Overhead		$15,000

Solution 3:

Proportion of variance	Cost	Proportion
Work in Process Inventory	37520	7.00%
Finished Goods Inventory	101840	19.00%
Cost of Goods sold	396640	74.00%
Total	536000

Account Title	Debit	Credit
Work in Process Inventory (15000*7%)	$1,050
Finished Goods Inventory (15000*19%)	$2,850
Cost of Goods Sold (15000*74%)	$11,100
To Manufacturing Overhead		$15,000

Solution 4:

Decrease in Cost of goods sold = $15000 - $11100 = $3,900

Hence, Net Operating Income will be higher by $3,900.