Question

Check my 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 $1615,000 of total manufacturing overhead for an estimated activity level of 85.000 machine-hours. points 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: eBook Print Machine-hours Manufacturing overhead cost Inventories at year-end: Raw materials Work in process (includes overhead applied of $73,150) Finished goods (includes overhead applied of $277,970) Cost of goods sold (includes overhead applied of $1,111,880) 77.000 $1,574,000 $ 14,000 94.000 Reference 357,200 $1.428.800 Required: 1 Compute the underapplied or overapplied overhead. 2. Assume that the company clases any underapplied or overapplied overhead to Cost of Goods Sold. Prepare the appropriate ournal 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? Complete this question by entering your answers in the tabs below. Required Required Required Required Compute the underapplied or overapplied overhead. Required 1 Required 2 >

Answer 1

1. Underapplied overhead: $111000

Predetermined overhead rate = $1615000/85000 machine hours = $19 per machine hour

Manufacturing overhead cost incurred $	1574000
Manufacturing overheads applied (77000 x $19)	1463000
Underapplied overheads $	111000

2.

Account	Debit	Credit
Cost of goods sold	111000
Manufacturing overhead		111000
(To close underapplied overhead)

3.

Account	Debit	Credit
Work in process	5550
Finished goods	21090
Cost of goods sold	84360
Manufacturing overhead		111000
(To close underapplied overhead)

Working:

	Overheads applied	% of total applied	Underapplied overheads allocated
Work in process	73150	5.0%	5550
Finished goods	277970	19.0%	21090
Cost of goods sold	1111880	76.0%	84360
Total $	1463000	100.0%	111000

4. Net operating income will be higher by $26640 if the underapplied overhead is allocated rather than closed entirely to cost of goods sold.

If the underapplied overhead is allocated, the net operating income will be higher to the extent of the underapplied overheads deferred in the work in process and finished goods inventory. Thus, it will be higher by $5550 + $21090 = $26640