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 $900,000 of total manufacturing overhead for an estimated activity level of 75,000 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 Manufacturing overhead cost Inventories at year-end: 60,000 $ 850,000 Raw materials Work in process (includes overhead applied of $36,000) Finished goods (includes overhead applied of $180,000) $ 30,000 $100,000 $500,000 1,400,000 Cost of goods sold (includes overhead applied of $504,000)

1a) Compute the underapplied or overapplied overhead.

b) Assume that the company closes any underapplied or overapplied overhead to Cost of Goods Sold. Prepare the appropriate journal entry.

c) 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.

d)  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. Compute under applied overhead or over applied overhead is as follows: Particulars Amount Manufacturing overhead applied -Machine hours × Predetermined overhead rate =60,000 XS 12 per machine hour Actual Manufacturing Overhead (given) S720,000 $850,000 Under applied overhead-Actual overhead - Applied overhead -S 850,000 S 720,000 130,000 Therefore, under applied overhead is $130,000 Working note: Total manufacturing costs Total machine hours Predetermined overhead rate- $900,000 75,000 machine hours $12 per machine hour

Record journal entries in the books ofL Company: Journal entries in the books of L Company Date Description Cost of goods sold Manufacturing overhead S130,000 S130,000 o record manufacturing overheads 3 Record journal entry: Journal entries in the books of L Company Date Description Debit (S) Credit(S) S6,500 S32,500 Work in process (S 36,000 S 720,000) x S130,000 Finished goods (S 180,000 S 720,000) x S130,000 Cost of goods sold (S 504,000 S 720,000) x S130,000S91,000 Manufad (To record manufacturing overheads and apportioned overhead S130,000 oto 4 Income Statement: Net operating income will be higher if the under applied overhead is allocated - $ 32,500 + $ 6,500 - $ 39,000

Net operating income will be higher by $39.000 , if the under applied overhead is allocated to work in process, finished goods and cost of goods sold.