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 $765,000 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:

Machine-hours		69,000
Manufacturing overhead cost	$	719,000
Inventories at year-end:
Raw materials	$	14,000
Work in process (includes overhead applied of $62,100)	$	183,000
Finished goods (includes overhead applied of $105,570)	$	311,100
Cost of goods sold (includes overhead applied of $453,330)	$	1,335,900

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.

	Event General Journal Debit Credit 1

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.

• Record the allocation of the underapplied/overapplied overhead to various accounts.

Note: Enter debits before credits.

	Event General Journal Debit Credit 1

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?

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?

	Net operating income will be if the overhead is allocated rather than closed entirely to cost of goods sold.

Answer 1

Solution 1:
Predetermined overhead rate
Estimated Manufacturing overhead	765000
/Estimated Machine hours	85000
Predetermined overhead rate	9.00
Underapplied or overapplied overhead
Applied overhead ($69000*$9)	$6,21,000
Actual Overhead cost	$7,19,000
Under applied Overhead	$98,000

Solution 2:
Account Title	Debit	Credit
Cost of Goods Sold	$98,000
Manufacturing Overhead		$98,000

Solution 3:
Proportion of variance	Overhead	Proportion
Work in Process Inventory	62100	10.00%
Finished Goods Inventory	105570	17.00%
Cost of Goods sold	453330	73.00%
Total	621000
Account Title	Debit	Credit
Work in Process Inventory (98000*10%)	$9,800
Finished Goods Inventory (98000*17%)	$16,660
Cost of Goods Sold (98000*73%)	$71,540
To Manufacturing Overhead		$98,000

Solution 4:
Overhead applied to cost of goods sold (if Closed only to cost of goods sold)	$98,000
Overhead applied to cost of goods sold (if applied proportionately)	$71,540
Net Operating Income will be higher by	$26,460