Question

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 $612,000 of total manufacturing overhead for an estimated activity level of 68,000 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 50,000 Manufacturing overhead cost $ 570,000 Inventories at year-end: Raw materials $ 18,000 Work in process (includes overhead applied of $22,500) $ 93,500 Finished goods (includes overhead applied of $76,500) $ 317,900 Cost of goods sold (includes overhead applied of $351,000) $ 1,458,600 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. Predetermined overhead rate = $ 612,000 / 68,000 machine hours = $ 9 per machine hour

Overhead applied = 50,000 machine hours x $ 9 = $ 450,000

Overhead underapplied = $ 570,000 - $ 450,000 = $ 120,000

2.

General Journal	Debit	Credit
Cost of Goods Sold	120,000
Manufacturing Overhead		120,000

3.

General Journal	Debit	Credit
Work in Process ( $ 93,500 / $ 1,870,000 ) x $ 120,000	6,000
Finished Goods ( $ 317,900 / $ 1,870,000 ) x $ 120,000	20,400
Cost of Goods Sold ( $ 1,458,600 / $ 1,870,000 ) x $ 120,000	93,600
Manufacturing Overhead		120,000

4. Net operating income will be higher by $ 26,400.