Question

3 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 $1,040,000 of total manufacturing overhead for an estimated activity level of 80,000 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. 5 points Skipped 71,000 990,000 $ Book Machine-hours Manufacturing overhead cont Inventories at year-end Raw materials Work in process (includes overhead applied of $73,840) Finished goods (includes overhead applied of $147.680) Coat of goods wold (includes overhead applied of 5701, 480) $ 11,000 $ 156,000 $ 312,000 $1,482,000 Print References 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) Overhead rate = 1040000/80000 = 13 per MH

Applied overhead = 71000*13 = 923000

Actual overhead = 990000

Under applied overhead = 990000-923000 = 67000

2) Adjusting entry

No	General Journal	Debit	Credit
	Cost of goods sold	67000
	Manufacturing overhead		67000

3) Adjusting entry

No	General Journal	Debit	Credit
	Work in process	5360
	Finished goods	10720
	Cost of goods sold	50920
	Manufacturing overhead		67000

4) If under applied overhead is allocated to WIP, FG and CGS rather than closed to CGS then net operating income is higher by (5360+10720) = 16080