Question

Check 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 $651,000 of total manufacturing overhead for an estimated activity level of 93,000 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. $ 74,000 618,000 Machine-hours Manufacturing overhead cost Inventories at year-end: Raw materials Work in process (includes overhead applied of $41,440) Finished goods (includes overhead applied of $98,420) Cost of goods sold (includes overhead applied of $378,140) $ 11,000 $ 146,400 $ 347,700 $ 1,335,900 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

Requirement (1) Compute the Underapplied or Overapplied Overhead Particulars Actual Manufacturing Overhead $ Applied Manufacturing Overhead (74,000MH x $7.00) $ Amount 618,000 518,000 Requirement (2) Journal Entry : Event General Journal 1 Cost of goods sold Manufacturing Overhead Credit Debit $ 100,000 $100,000 Underapplied Manufacturing Overhead $ 100,000 (To Close Balance in MOH to Cost of goods sold) Working Note: Calculate the Predetermined Overhead Rate : Estimated Manufacturing Overhead (A) Estimated Machine Hours (B) $ Credit 651,000 93000 Machine Hours Requirement (3) Journal Entry : Event General Journal 1 Work in Process Finished goods Cost of goods sold Manufacturing overhead Debit $ 8,000 $ 19,000 $ 73,000 Predetermined Overhead Rate (A/B) $ 7.00 Per MH $ 100,000 (To Record underapplied OH to Various accounts) Note : Please comment down for any further clarifications Requirement (4) Net Operating Income will be $27000 Greater if the underapplied overhead is allocated among work in process, finished goods and cost of goods sold rather than closed directly to cost of goods sold. Note : Cost of goods sold - If Directly closed to COGS $ 1,435,900 Cost of goods sold - If OH is allocated to different accounts $ 1,408,900 $ 27,000