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 $1,207,000 of total manufacturing overhead for an estimated activity level of 71,000 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: 55,000 $ 1,169,000 Machine-hours Manufacturing overhead cost Inventories at year-end: Raw materials Work in process (includes overhead applied of $46, 750) Finished goods (includes overhead applied of $187,000) Cost of goods sold (includes overhead applied of $701,250) $ 11,000 $ 100,000 $ 400,000 $ 1,500,000 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

Actual machine hours	55000
X Predetermined overhead rate	17	=1207000/71000
Overhead applied	935000
1
Manufacturing overhead cost	1169000
Less: Overhead applied	935000
Underapplied overhead	234000
2
General Journal	Debit	Credit
Cost of goods sold	234000
Manufacturing overhead		234000
3
General Journal	Debit	Credit
Work in Process	11700		=234000*46750/935000
Finished goods	46800		=234000*187000/935000
Cost of goods sold	175500		=234000*701250/935000
Manufacturing overhead		234000
4
Net operating income will be $58500 greater if the underapplied overhead (234000-175550)
is allocated rather than closed entirely to cost of goods sold