Question

# 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 \$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

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

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?

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