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,eee $30,eee Work in process (includes overhead applied of $36,00) 100,eee Finished goods (includes overhead applied of $180,e00) $500,eee Cost of goods sold (includes overhead applied of $504,eee) $1,40e,e0 Raw materials 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 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

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Solution: 1) Predetermined overhead rate (900000/75000)- 12 Actual overhead Less: Applied overhead (60000 12 Underapplied overhead 850000 720000 130000 Note: Ignore the order of commas in amount Date 2) Account title and explaination Cost of goods sold Manufacturing overhead (To close the underapplied overhead to COGS) bitCredit 130000 130000 3) Date Account title and explaination Work in process (100000/2000000) *130000 Finished goods (500000/2000000) *130000 Cost of goods sold (1400000/2000000) *130000 Manufacturing overhead To close the underapplied overhead) bitCredit $6,500 $ 32,500 $ 91,000 130000 4) Net Operating income will be "Higher" by (130000-91000) $39,000