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 $1,332,000 of total manufacturing overhead for an estimated activity level of 74,000 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: 62,000 $ 1,300,000 Machine-hours Manufacturing overhead cost Inventories at year-end: Raw materials Work in process (includes overhead applied of $100,440) Finished goods (includes overhead applied of $223,200) Cost of goods sold (includes overhead applied of $792,360) $ 20,000 $ 176,400 $ 392,000 $ 1,391,600 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 3. Assume that the company allocates any underapplied or over appliedoverhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. Prepare the appropriate journal entry. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 4. How much higher or lower will net operating income be if the underapplied or overopplied 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. Reg 1 Reg 2 Reg 3 Reg 4 Compute the underapplied or overapplied overhead. Prav 3 of 4 13 Next >

Answer 1

1. Underapplied overhead = $184,000

Predetermined overhead rate = $1,332,000/ 74,000 = $18 per machine hour

Applied overhead = Machine hours × Predetermined overhead rate
= 62,000 × $18 = $1,116,000

Actual overhead = $1,300,000

Underapplied overhead = $1,300,000 - $1,116,000 = $184,000

If the actual overhead is more than the applied overhead, the overhead is underapplied.

2 & 3.

2) Journal entry credit Date account and explanation debit Cost of goods sold 184,000 Manufacturing overhead (To record under applied overhead) 3) Journal entry 184,000 Date account and explanation debit credit Work in process 16,560 Finished goods 36,800 Cost of goods sold 130,640 Manufacturing overhead 184,000 (To record under applied overhead)

Allocation of underapplied overhead:

Work in process = $100,440/ ( $100,440 + $223,200 + $792,360) = 9%

= $184,000× 9% = $16,560

Finished goods = $223,200/ ( $100,440 + $223,200 + $792,360) = 20%

= $184,000× 20% = $36,800

Cost of goods sold = $792,360/ ( $100,440 + $223,200 + $792,360) = 71%

= $184,000× 71% = $130,640

4. Net operating income will be $53,360 higher if the underapplied overhead is allocated rather than closed entirely to cost of goods sold.

Net operating income will be higher by the difference between underapplied overhead and cost if goods sold actually allocated, $184,000 - $130,640 = $53,360