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 $592,000 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 67,000 $ 551,000 Machine-hours Manufacturing overhead coat Inventories at year-end: Raw materials Work in process (includes overhead applied of $37,520) Finished goods (includes overhead applied of $101, 840) Cost of goods sold (includes overhead applied of $396,640) 13,000 139,300 $ 378, 100 $1,172,600

Answer 1

1) Overhead rate = 592000/74000 = 8 per MH

Applied overhead = 67000*8 = 536000

Actual overhead = 551000

Under applied overhead = 551000-536000 = 15000

2) Journal entry

No	General Journal	Debit	Credit
	Cost of goods sold	15000
	Manufacturing overhead		15000
	(To record under applied overhead)

3) Journal entry

No	General Journal	Debit	Credit
	Work in process	1050
	Finished goods	2850
	Cost of goods sold	11100
	Manufacturing overhead		15000
	(To record under applied overhead)

4) Net operating income Higher by (1050+2850) = $3900