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 $735,000 of total manufacturing overhead for an estimated activity level of 49,000 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: $ 4e.ee 693.ee Machine.hours Manufacturing overhead cost Inventories at year end : Raw materials Work in process (includes overhead applied of $60,000) Finished goods (includes overhead applied of $102.ee) Cost of goods sold includes overhead applied of 5438,000) $ $ $ $ 20,00 185,000 314. See 1,350,500 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 Req 2 Req3 Reg 4 Compute the underapplied or overapplied overhead. Reg 2 >

Answer 1

>\\utin - .) The predetermined Overhead tate is computed as follows: Predetermined Overhead rate Estimates Total Manufacturing overhead Estimated Total Machine Hours - = $735,000 19,000 =$15 per hour. $693,000 $600,000 Actual Manufacturing overhead cost. Manufacturing overhead applied to work in process during the year (110,000 hours * $15 per hour) Ź $93.000 ... under applied overhead cost . ($693,000-$600.000)

1 2) Appropriate Journal Entry to close underapplied overhead'. $93,000 $93,000 Credit (s) cost of Goods sold Manufacturing overhead 1 3) Appropriate Journal Entry Event General Journal work in process($93,000 110%) finished Goods ($93,000 X 11%) cost of goods sold ($93,000+ 73%). Manufacturing overhead. Debit(s) $9,300 $15,810 $61,890 : $93,000 Explanations The under applied overhead would be allocated using the following percentages. Total overhead applied during the year = $.600.000 - of overhead applied - $60.000 in work in process $600,000 and x 100 = 10%.

Yol overhead applied . in Finished goods $102,000 1100 16001000 17% - 73% 1. Ex overhead applied - in costof goods sold $438.000 x100 $600.000 1 ) comparing the two methods: cost of goods sold if the under applied $1,443,500 overhead is closed to cost of goods sold ($1,350, 500+ $93,000) cost of goods sold in the under. applied $1,418,390 overhead is closed to work in process, finished goods, cost of goods sold ($1,350, 500+67,890) Difference in cost of goods sold $25.110 Thus the net operating income will be $25,118 greater if the under applied overhead is closed to work in process, finished goods and cost of goods sold rather than being closed to cost of goods sold.

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