Question

PROBLEM 3-22 Predetermined Overhead Rate; Disposition of Underapplied or Overapplied Over- head [LO3-1, LO3-7] 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 following estimates were used in preparing the predetermined overhead rate at the beginning of the year: 75,000 $795,000 $1.40 Machine-hours Fixed manufacturing overhead cost Variable manufacturing overhead per computer-hour.. During the year, a glut 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 follow- ing actual cost and operating data for the year: 60,000 $850,000 Machine-hours Manufacturing overhead cost Inventories at year-end: $30,000 $100,000 $500,000 $1,400,000 Raw materials Work in process (includes overhead applied of 36,000) Finished goods (includes overhead applied of 180,000) Cost of goods sold (includes overhead applied of 504,000)

Answer All Questions:

1. Compute the company's predetermined overhead rate.

2. Compute the underapplied or overapplied overhead.

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

4. Assume that the company allocates any underapplied or overapplied overhead to Work in Process, Finished Goods, and Cost of Goods Sold on the basis of the amount of overhead applied that remains in each account at the end of the year. Prepare the journal entry to show the allocation for the year.

5. How much higher or lower will net operating income be if the underapplied or overapplied overhead is allocated rather than closed directly to Cost of Goods Sold?

Answer 1

1) Predetermine overhead rate = (795000/75000+1.40) = 12 per hour

2) Applied overhead = 60000*12 = 720000

Actual overhead = 850000

Under applied overhead = 130000

3) Adjusting entry

Date	account and explanation	Debit	Credit
	Cost of goods sold	130000
	Manufacturing overhead		130000
	(To record under applied overhead)

4) Adjusting entry

Date	account and explanation	Debit	Credit
	Work in process (130000*5%)	6500
	Finished goods	32500
	Cost of goods sold	91000
	Manufacturing overhead		130000
	(To record under applied overhead)

5) Net operating income increase by (32500+6500) = 39000