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 $1,615,000 of total manufacturing overhead for an estimated activity level of 85,000 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: 77,000 $ 1,574,000 Machine-hours Manufacturing overhead cost Inventories at year-end: Raw materials Work in process (includes overhead applied of $73,150) Finished goods (includes overhead applied of $277,970) Cost of goods sold (includes overhead applied of $1,111,880) $ 14,000 $ 94,000 $ 357,200 $ 1,428,800 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

AR SK 35 38 Solution 1: Predetermined overhead rate Estimated Manufacturing overhead /Estimated Machine hours Predetermined overhead rate 40 1615000 85000 19.00 41 44 Underapplied or overapplied overhead Actual overhead Applied overhead (19*77000) 15740001 1463000 47 Under applied Overhead 111000 Credit Solution 2: Account Title Cost of Goods Sold Dr To Manufacturing Overhead Debit $111,000 $111,000 58 Cost 59 Solution 3: Proportion of variance Work in Process Inventory Finished Goods Inventory Cost of Goods sold Total Proportion 73150 5.00% 277970 19.00% 1111880 76.00% 1463000 Credit Account Title Work in Process Inventory (111000*5%) Finished Goods Inventory (111000*19%) Cost of Goods Sold (111000*76%) To Manufacturing Overhead Debit $5,550 $21,090 $84,360 $111,000 73 74 75 70 -100 (2) ) Sheet346 ) Sheet348 ) Sheet310 Sheet317

Solution 4:

Cost of goods sold will decrease by = $111000 - $84360 = $26,640

Therefore,

Net operating income will increase by $26,640.