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# Problem 3-12 Predetermined Overhead Rate; Disposing of Underapplied or Overapplied Overhead [LO3-4] Luzadis Company makes furniture...

Problem 3-12 Predetermined Overhead Rate; Disposing of Underapplied or Overapplied Overhead [LO3-4]

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 \$1,066,000 of total manufacturing overhead for an estimated activity level of 82,000 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 68,000 Manufacturing overhead cost \$ 1,029,000 Inventories at year-end: Raw materials \$ 17,000 Work in process (includes overhead applied of \$88,400) \$ 192,000 Finished goods (includes overhead applied of \$132,600) \$ 288,000 Cost of goods sold (includes overhead applied of \$663,000) \$ 1,440,000

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?

#### Homework Answers

Answer #1
 Actual machine hours 68000 X Predetermined overhead rate 13 =1066000/82000 Overhead applied 884000 1 Manufacturing overhead cost 1029000 Less: Overhead applied 884000 Underapplied overhead 145000 2 Debit Credit Cost of goods sold 145000 Manufacturing overhead 145000 3 Debit Credit Work in Process 14500 =145000/884000*88400 Finished goods 21750 =145000/884000*132600 Cost of goods sold 108750 =145000/884000*663000 Manufacturing overhead 145000 4 Net operating income will be \$36250 greater if the underapplied overhead (145000-108750) is allocated rather than closed entirely to cost of goods sold
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