Question

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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 $1,040,000 of total manufacturing overhead for an estimated activity level of 80,000 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: 71.000 990,000 $ Machine-hours Manufacturing overhead cost Inventories at year-end materials Work in process (includes overhead applied of 573,840) Pinished goods includes overhead applied of $147,680) Coat of goods sold includes overhead applied of $701, 480) $ 11,000 $ 156.000 S 312,000 $ 1.492.000 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. (If no entry is required for a transaction/event, select "No Journal entry required" in the first account field.) 3. Assume that the company allocates any underapplied or over appliedoverhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. Prepare the appropriate journal entry (If no entry is required for a transaction/event, select "No Journal entry required" in the first account field.) 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? Complete this question by entering your answers in the tabs below. Reg Reg 2 Req3 Reg 4 Compute the underapplied or overapplied overhead. Reg 2 >

Answer 1

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Luzadis Company
Workings
Calculation of Manufacturing overhead applied
	Amount $	Note
Applied to Work in process	73,840.00
Applied to Finished goods	147,680.00
Applied to Cost of good sold	701,480.00
Manufacturing overhead applied	923,000.00	A
Answer 1
Calculation of under applied/ over applied overhead	Amount $
Manufacturing overhead amount applied	923,000.00	See A
Manufacturing overhead cost	990,000.00	B
Under applied	67,000.00	C=B-A
Answer 2
If overhead variance is closed through cost of good sold.
Journal Entry
Account	Debit $	Credit $
Cost of Goods Sold	67,000.00		See C
Manufacturing overhead		67,000.00
Answer 3
If overhead variance closed in the ratio of work in process, finished goods and cost of good sold.
	Work in process	Finished goods	Cost of good sold	Total
Amount	156,000.00	312,000.00	1,482,000.00	1,950,000.00
% of allocation	8.00%	16.00%	76.00%	100.00%
Over applied overhead	5,360.00	10,720.00	50,920.00	67,000.00
Journal Entry
Account	Debit $	Credit $
Work in process	5,360.00
Finished goods	10,720.00
Cost of good sold	50,920.00
Factory overhead		67,000.00
Answer 4
Under applied overhead allocated to	Amount $
Work in process	5,360.00
Finished goods	10,720.00
Total	16,080.00
Income will be higher by $ 16,080 if under applied overhead in allocated to work in process, finished goods and cost of good sold rather than being closed to Cost of Goods Sold.