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 $980,000 of total manufacturing overhead for an estimated activity level of 98,000 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 $ 78,000 941,000 Machine-hours Manufacturing overhead cost Inventories at year-end: Raw materials Work in process (includes overhead applied of $39,000) Finished goods (includes overhead applied of $117,000) Cost of goods sold (includes overhead applied of $624,000) $ 15,000 $ 97,500 $ 292,500 $1,560,000 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 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? Complete this question by entering your answers in the tabs below. < Prev 4 of 5 !!! Next >

Answer 1

Over head rate= Predetermined total overhead/Machine hours= 980000/98000= $10 per machine hour

1. Applied overhead= $10*78000 hours= $780000. Actual overhead= $941000. Underapplied overhead= 941000-780000= $161000

2. Journal Entry

• Cost of goods sold 161000
• Factory overhead 161000
• (Being applied overhead recorded)

3. Journal entry if proportionately divided

• Work in progress(5%) 8050
• Finished goods (15%) 24150
• Cost of goods sold 128800
• Factory overhead 161000
• (Being applied overhead recorded)

4. Net income increases by= 8050+24150= 32200