Question

Problem 3-12 Predetermined Overhead Rate; Disposing of Underapplied or Overapplied Overhead [LO3- 4) 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 $1,615,000 of total manufacturing overhead for an estimated activity level of 85,000 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: 77,000 $ 1,574,000 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) $ 14,000 $ 94,000 $ 357,200 $ 1,428,800 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

1) Overhead rate = 1615000/85000 = 19 per MH

Applied overhead = 77000*19 = 1463000

Actual overhead = 1574000

Under applied overhead = 1574000-1463000 = 111000

2) Adjusting entry

No	General Journal	Debit	Credit
	Cost of goods sold	111000
	Manufacturing overhead		111000

3) Adjusting entry

No	General Journal	Debit	Credit
	Work in process	5550
	Finished goods	21090
	Cost of goods sold	84360
	Manufacturing overhead		111000

4) Net operating income will be higher by (5550+21090) = 26640 if the under applied overhead is allocated rather than closed entirely to cost of goods sold