Question

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Check my 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 $1,152,000 of total manufacturing overhead for an estimated activity level of 72,000 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. 55,000 $ 1,102,000 Machine-hours Manufacturing overhead cost Inventories at year-end: Raw materials Work in process (includes overhead applied of $52,800) Finished goods (includes overhead applied of $167,200) Cost of goods sold (includes overhead applied of $660,000) 18,000 $ 114,600 $ 362,900 $ 1,432,500 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 overapplied overhead is allocated to Work in Process, Finished Goods, and Cost of Goods Sold rather than being closed to cost of Goods Sold? < Prev 3 of 5 Score answer >

Answer 1

Answer 1

Manufacturing overhead	1102000
Applied overhead	880000
Under applied overhead	222000

Working note:

Applied overhead in WIP   = 52800

Applied overhead in finished goods = 167200

Applied overhead in COGS = 660000

Applied overhead   = 880000

Answer 2

Account title and explanation	Debit	Credit
Cost of goods sold	222000
Manufacturing overhead		222000
(to record the transfer of under applied overhead to COGS)

Answer 3

Account title and explanation	Debit	Credit
Work in process (222000 * 52800 / 880000)	13320
Finished goods (222000 * 167200 / 880000)	42180
Cost of goods sold (222000 * 660000 / 880000)	166500
Manufacturing overhead		222000
(to record the under or over applied overhead transferred to WIP, FG, COGS)

Answer 4

The net operating profit will be increased to the extent of 55500 (13320 + 42180) if the under applied overhead is allocated to WIP, FG, COGS rather than being closed to COGS

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