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 $900,000 of total manufacturing overhead for an estimated activity level of 75,000 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: 60,000 850,000 $ Machine-hours Manufacturing overhead cost Inventories at year-end: Raw materials Work in process (includes overhead applied of $36,000) Finished goods (includes overhead applied of $180,000) (includes overhead applied of $504,000) $ 30,000 $ 100,000 $ 500,000 $ 1,400,000 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?

Answer 1

1
Manufacturing overhead cost	850000
Less: Overhead applied	720000	=36000+180000+504000
Underapplied overhead	130000
2
General Journal	Debit	Credit
Cost of goods sold	130000
Manufacturing overhead		130000
3
General Journal	Debit	Credit
Work in Process	6500		=130000/720000*36000
Finished goods	32500		=130000/720000*180000
Cost of goods sold	91000		=130000/720000*504000
Manufacturing overhead		130000
4
Net operating income will be $39000 greater if the underapplied overhead (130000-91000)
is allocated rather than closed entirely to cost of goods sold