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 $735,000 of total manufacturing overhead for an estimated activity level of 49,000 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: 40,000 693,000 $ + Machine-hours Manufacturing overhead cost Inventories at year-end Raw materials Work in process (includes overhead applied of $60,000) Pinished goods includes overhead applied of $102,000) Cost of goods sold includes overhead applied of $438,000) $ 20,000 $ 185.000 $314,500 $1,350, 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?

Answer 1

1. Computation Of Under applied or Overapplied ovewhead Under applied ovewhead - Actual Overhead - Applied ovewheed = $ 693000 - $600 000 $93000 Unden applied Overhead $ 93000 Note-1 Applied Over head Estimated to teel manufacturing Overhead Estimated Machine Hours $ 73500o 49000 machine hour $15 ber machine Hour Applied Overhead : $15 peu machine Hour Rate Actual o verhead = Machine Hours (Actual) * Applied Ove x head late 40000 x $15 - $ 600 000 Actual Machine Hours 40.000 machine Hours Unele applied or Applied Overhead : Under applied is a situation in which Actual Overhead of the Company is more than the company budgeted / Estimated Overhead. It means Compong Compang has incurred more o veuhead Expense than its Estimated ovew bead in an accounting period Over applied Overhead is a situation in which Actual Overhead of is less than the Company budgeted lEstimated Overhead. It means company has incurred less overhead Expense than its Estimated over head in an accounting periodo the company

Preparing Appropriate sou mal Entry assuming that combory any Journal Entry: closes Under applied or Overhead to cost of Goods sold: Date Credit General Journal Debit Cost of Goods sold $ 93000 $ 93000 Manufacturing over head | To record Under applied overhead) to cost of Goods sold Note -22 Under applied overhead is normally reported as Pre paid Expenses . Prepaid Expenses are assets and shown in Balance sheet. Cost of Goods sold are direct costs associated with the Production of Goods sold by a Company. At the end of le riod, the company records und en applied overhead as the cost of Goode sold, thus increasing expense on In Come statement and decreasing that period's net income. Hence, Under applied overhead increases the expense in cost of Goods sold and decreases the net income. So, cost of boods sold are debited and Manufacturing overhead credited.

3. Prepaning Journal Entry assuming that company allocates Underapplied or over applied overhead to pro potiomally to Work in process, finished boods and cost of Goods sold. Date beneral Journal Debit credit Work in Process finished Goods |$ 9300 $ 15810 $67890 Cost of Goods old $93000 Manufacturing over head (To record Undey gbbled over head)

Notes - 3 Assuming company allocates Under applied overhead proportionally to work in process, Cost of Goods sold and Finished Goods Work in Process proportion $60000 $ 600 000 X10o = 10 in Overhead $102 000 194. x 10o = $ 600 000 finished Goods proportion in overhead Cost of Goods sold proportion in Ovey head $ 438000 X là 0 - 73% $ 600000 Hence , Undeu applied Overhead is allocated in to Work in process, Finished goods and cost of Goods sold in the Windboel het proportion of 10%, 17% and 73 4. respectively. Dodeu applied over bead allocates to Work in process - $ 93000 x 108 - $9300 to Under applied overhead allocates $93000 x 174. - $ 15810 finished Goods criUndeu applied overhead alolates = $93000 x 73.1: - $ 67890 to Cost of Goods sold 4. Net Operating In come it will be higher by an amount of $25110 if the . Under applied over bead is allocated to work in process, finished Goods and cost of Goods sold rather than being closed to cost of Goods sold. Higher in Net operating Income $25110

Note-u $ 93000 less: anufacturing over head applied to Cost of Goods sold Manufacturing overhead applied to laboratorios Regados cost of broods in Case Proportionally allocates to worte in Process, finished Goods and Cost of Goods sold ($ 67890) $25110 Highen in Net operating Income When Undey applied overhead is allolates to cost of Goods sold it increases expense and decreases net and decreases net operating Income in Income statement. By proportionally allocating Undey oupplied overhead, Undex applied allocates to cost of Goods sold decreases resu increase of Net operating Income. ve bell