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 $1,040,000 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: Raw materials Work in process (includes overhead applied of $73,840) Finished goods (includes overhead applied of $147, 680) Cost of goods sold (includes overhead applied of $701, 480) $ 11,000 $ 156,000 $ 312,000 $1,482,000 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. 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Compute the underapplied or overapplied overhead.

Answer 1

Actual machine hours	71000
X Predetermined overhead rate	13	=1040000/80000
Overhead applied	923000
1
Manufacturing overhead cost	990000
Less: Overhead applied	923000
Underapplied overhead	67000
2
	Debit	Credit
Cost of goods sold	67000
Manufacturing overhead		67000
3
	Debit	Credit
Work in Process	5360		=67000/923000*73840
Finished goods	10720		=67000/923000*147680
Cost of goods sold	50920		=67000/923000*701480
Manufacturing overhead		67000
4
Net operating income will be $16080 greater if the underapplied overhead (67000-50920)
is allocated rather than closed entirely to cost of goods sold