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 $520.000 of total manufacturing overhead for an estimated activity level of 65,000 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 $ 54, eee 488, eee Machine-hours Manufacturing overhead cost Inventories at year-end: Raw materials Work in process (includes overhead applied of $25,920) Finished goods (includes overhead applied of $73,448) cost of goods sold includes overhead applied of $332, 640) $ 19,000 5 117, eee $ 331,500 1,501,500 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 overopplied overhead is allocated to Work in Process, Finished Goods, and Cost of Goods Sold rather than being closed to Cost of Goods Sold? Answer is not complete. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) No Event Credit Debit 12,406 1 1 General Journal Work in process Finished goods Cost of goods sold Manufacturing overhead 56,000 < Required 2 Required 4 )

Answer 1

3.

No.	Event	General Journal	Debit	Credit
1	1	Work in process	3360
		Finished goods	9520
		Cost of goods sold	43120
		Manufacturing overhead		56000
		(To close underapplied overhead)

Working:

	Overheads applied	% of total applied	Underapplied overheads allocated
Work in process	25920	6.0%	3360
Finished goods	73440	17.0%	9520
Cost of goods sold	332640	77.0%	43120
Total $	432000	100.0%	56000

4. Net operating income will be higher by $12880 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 $3360 + $9520 = $12880.