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 $765,000 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: Machine-hours 69,000 $ 719,000 Manufacturing overhead cost Inventories at year-end: Raw materials Work in process (includes overhead applied of $62,100) Finished goods (includes overhead applied of $105,570) $ 14,000 $ 183,000 $ 311,100 1,335,90o Cost of goods sold (includes overhead applied of $453,330) 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 beina closed to Cost of Goods Sold?

Net Income will be __ (greater,lesser) if the (overapplied, underapplied)

Answer 1

1) Calculate the under applied or overappled Overhead :				2) Record the journal entry for under / over applied overhead of COGS
Manfacturing Overhead		$        719,000		Date	Accounts title and explaination	Debit	Credit
Applied Overhead		$        621,000			Cost of goods sold	$ 98,000
					To Manfacturing overheads		$ 98,000
Under applied overhead		$          98,000
					(To record the transfer of under applied oh to cogs)
Note :
Applied overhead :
Applied overhead in WIP	$          62,100			3) Record the journal entry for proportional allocation of under or over applied OH
Applied overhead in Finished goods	$        105,570			to WIP,FG and COGS
Applied OH in COGS	$        453,330
				Date	Accounts title and explaination	Debit	Credit
Applied Overhead	$        621,000				Work in process	9800
					98000*62100/621000
					Finished goods	16660
					98000*105570/621000
					Cost of goods sold	71540
					98000*453330/621000
					To Manfacturing overheads		98000
					(To record the under or over applied oh transferred to Wip,FG, and COGS)
4) The net operating profit will be increased to the extent of 26460(9800+16660)
if the under applied overhead is allocated to Wip , FG and COGS
rather than being closed to COGS