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 $900,000 of total manufacturing overhead for an estimated activity level of 75,000 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: $ 60,000 850,000 Machine-hours Manufacturing overhead cost Inventories at year-end: Raw materials Work in process (includes overhead applied of $36,000) Finished goods (includes overhead applied of $180,000) Cost of goods sold (includes overhead applied of $504,000) $ 30,000 $ 100,000 $ 500,000 $ 1,400,000 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

Please find below table useful to compute desired results: -

А E F 900000 75000 Actual Cost and operating Data 1 Total manufacturing overhead 2 Estimated activity level 3 4 Machine hours 5 Manufacturing overhead cost 6 Inventories at Year-end 7 Raw materials 60000 850000 30000 9 Work in process 10 Finished goods 11 Cost of Goods Sold Overhead applied 36000 180000 504000 =100000-B9 =500000-180000 =1400000-B11 12 Credit =C1/C2 =C5 =C4%B13 =B14-B15 Account Titles and Explanation Debit Cost of Goods sold =F15 Manufactruing Overhead =B16 13 Predetermined Overhead rate 14 Total manufacturing overhead cost actually incurred 15 Total manufacturing overhead applied to WIP 16 Under-applied manufacturing overhead 17 18 Overhead applied during the year 19 WIP 20 Finished Goods 21 Cost of goods sold 22 Total Credit Amount %age Account Titles and Explanation Debit =B9 =B19/B22 Work in process =B16*C19 =B10 =B20/B22 Finished goods =B16*C20 =B11 =B21/B22 Cost of Goods sold =B16*C21 I=SUM(B19:B21) I=SUM(C19:C21) Manufacturing overhead | =B16 24 COGS if the underapplied overhead is closed directly to COGS 25 COGS if the underapplied overhead is allocated among the accounts 26 Difference in COGS =B11+C11+B16 =B11+C11+E21 =B24-B25 Higher

End results would be as follows: -

В C E 900.000 75,000 60,000 850,000 30.000 Overhead applied 36.000 180.000 504.000 64.000 320,000 896,000 А 1 Total manufacturing overhead 2 Estimated activity level 3 Actual Cost and operating Data 4 Machine hours 5 Manufacturing overhead cost 6 Inventories at Year-end 7 Raw materials 8 9 Work in process 10 Finished goods 11 Cost of Goods Sold 12 13 Predetermined Overhead rate 14 Total manufacturing overhead cost actually incurred 15 Total manufacturing overhead applied to WIP 16 Under-applied manufacturing overhead 17 18 Overhead applied during the year 19 WIP 20 Finished Goods 21 Cost of goods sold 22 Total 23 24 COGS if the underapplied overhead is closed directly to COGS 25 COGS if the underapplied overhead is allocated among the accounts 26 Difference in COGS Credit 12 850,000 720.000 130,000 Account Titles and Explanation Cost of Goods sold Manufactruing Overhead Debit 130,000 130,000 Amount Credit 36.000 180.000 504.000 720,000 %age Account Titles and Explanation 5% Work in process 25% Finished goods 70% Cost of Goods sold 100% Manufacturing overhead Debit 6,500 32,500 91,000 130,000 1,530,000 1,491,000 39,000 Higher