Question

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 $735,000 of total manufacturing overhead for an estimated activity level of 49,000 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		40,000
Manufacturing overhead cost	$	693,000
Inventories at year-end:
Raw materials	$	20,000
Work in process (includes overhead applied of $60,000)	$	185,000
Finished goods (includes overhead applied of $102,000)	$	314,500
Cost of goods sold (includes overhead applied of $438,000)	$	1,350,500

Required:

1. Compute the underapplied or overapplied overhead. COMPLETED

Underapplied overhead cost

$93,000

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

Costs of Goods Solde . Debit 93,000

Manufacturing Overhead . Credit 93,000

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

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.

Date	account and explantion	debit	credit
	Work in process (93000*10%)	9300
	Finished goods (93000*17%)	15810
	Cost of goods sold (93000*73%)	67890
	Manufacturing overhead		93000
	(To record under applied closed)

4) Net operating income will be higher by (9300+15810) = $25110