Question

Problem 3-12 (Algo) 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 $560,000 of total manufacturing overhead for an estimated activity level of 70,000 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: 61,000 514,000 $ Machine-hours Manufacturing overhead cost Inventories at year-end: Raw materials Work in process (includes overhead applied of $48,800) Finished goods (includes overhead applied of $92,720) Cost of goods sold (includes overhead applied of $346,480) $ 14,000 $ 188,000 $ 357, 200 $ 1,334,800

Answer 1

1) Overhead rate = 560000/70000 = 8 per MH

Applied overhead = 61000*8 = 488000

Actual overhead = 514000

Under applied overhead = 514000-488000 = 26000

2) Journal entry

No	General Journal	Debit	Credit
	Cost of goods sold	26000
	Manufacturing overhead		26000

3) Journal entry

No	General Journal	Debit	Credit
	Work in process	2600
	Finished goods (26000*19%)	4940
	Cost of goods sold	18460
	Manufacturing overhead		26000

4) Net operating income will be higher (2600+4940) = 7540 if the under applied overhead is allocated rather than closed entirely to cost of goods sold