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 $1,040,000 of total manufacturing overhead for an estimated activity level of 80,000 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 Spoed 71.000 990.000 Machinebours Manufacturing overhead con Inventaries a year and Raw materials Work in proces includes overbeadsplied Finished goods ineludes overhead appliedot 107 $73, Cestf goods sold includes the appliedot s 11,000 156000 312.000 152.000 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 wil net operating income befthe 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. Regedi Recured 2 Rered) Required Compute the under applied or overapplied overhead.

Answer 1

Solution:

1.) Predetermined overhead rate

Estimated total manufacturing overhead	$1,040,000
Estimated total compute hours	80,000
Predetermined overhead rate ($1,040,000/80,000 hours)	$13
Actual manufacturing overhead costs	$990,000
Manufacturing overhead applied to work in process during the year: (71,000 actual machine hours × $13per hour) ( Predetermined overhead rate)	$923,000
Under applied overhead costs	$67,000

2.) Journal entry

Event	General journal	Debit	Credit
1.)	Cost of goods sold	$67,000
	Manufacturing overhead		$67, 000

3.)

Under applied overhead would be allocated using the following percentage:

Work in process(73,840/923,000) 8%	$73,840
Finished goods (147,680/923,000) 16%	$147,680
Cost of goods sold (701480/923000) 76%	$701,480
Total	$923,000

The entry to record the allocation of the under applied overhead would be:

Event	General Journal	Debit	Credit
1.)	Work in process (67000×8%)	$5,360
	Finished goods (67,000× 16%)	$10,720
	Cost of goods sold (67000 × 76%)	$50,920

Manufacturing overhead $67000(Cr.)

4.) Comparing the two methods:

Cost of goods sold if the under applied overhead is closed to cost of goods sold ($1,482,000 + $67,000)

=$1,549,000

Cost of goods sold if the under applied overhead is closed to work in process, Finished goods, and Cost of goods sold ($1,482,000+$50,920)

=$1,532,920

Difference in cost of goods sold =$1,549,000 - $1,532,920

=$16,080

So, net operating income will be $16,080 greater if the under applied is closed to work in process, finished goods and cost sold rather than being closed to cost of goods sold.