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 $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:

Machine-hours		74,000
Manufacturing overhead cost	$	618,000
Inventories at year-end:
Raw materials	$	11,000
Work in process (includes overhead applied of $41,440)	$	146,400
Finished goods (includes overhead applied of $98,420)	$	347,700
Cost of goods sold (includes overhead applied of $378,140)	$	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. (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 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

Actual machine hours	74000
X Predetermined overhead rate	7	=651000/93000
Overhead applied	518000
1
Manufacturing overhead cost	618000
Less: Overhead applied	518000
Underapplied overhead	100000
2
	Debit	Credit
Cost of goods sold	100000
Manufacturing overhead		100000
3
	Debit	Credit
Work in Process	8000		=100000/518000*41440
Finished goods	19000		=100000/518000*98420
Cost of goods sold	73000		=100000/518000*378140
Manufacturing overhead		100000
4
Net operating income will be $27000 greater if the underapplied overhead (100000-27000)
is allocated rather than closed entirely to cost of goods sold