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 $1,068,000 of total manufacturing overhead for an estimated activity level of 89,000 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 $ 1,029,000
Inventories at year-end:
Raw materials $ 10,000
Work in process (includes overhead applied of $44,400) $ 91,000
Finished goods (includes overhead applied of $150,960) $ 309,400
Cost of goods sold (includes overhead applied of $692,640) $ 1,419,600

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	Predetermined Oberhead rate = $ 1,068,000 / 89,000 machine hours
		= $ 12 per machine hour
	Overhead applied = $ 12 * 74,000 hours
		= $ 888,000
	Actual Overhead	1029000
	Overhead applied	888000
	Underapplied Overhead	141000
2	Jounal
	Account Titles	Debit	Credit
	Cost of Goods Sold	141000
	Manufacturing Overhead		141000
3	Work in Process	7050
	Finished Goods	23970
	Cost of Goods Sold	109980
	manufacturing Overhead		141000
4	Net Operating Income will be higher by $ 31,020
	( 7,050 + 23,970 )
	Thank You!
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