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 $1,368,000 of total manufacturing overhead for an estimated activity level of 72,000 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: 61.000 $ 1.324,000 Machine-hours Manufacturing overhead cost Inventories at year-end Raw materials Work in process (includes overhead applied of $115,900) Finished goods (includes overhead applied of $208, 620) Cost of goods sold (includes overhead applied of $834, 480) 16,000 $ 188,000 $ 338.400 $ 1,353,600 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 ovsrapplied 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

Answer-

1. Predetermined overhead rate = $1,368,000 / 72,000 = 19.00

Total manufacturing overhead cost actually incurred	1,324,000
Total manufacturing overhead applied to work in process (19*61,000)	1,159,000
Under-applied manufacturing overhead	165,000

2.

General Journal	Debit ($)	Credit ($)
Cost of goods sold	165,000
Manufacturing overhead		165,000

3.Overhead applied during the year-

	Amount ($)	Percent (%)
Work in process	115,900	10%
Finished goods	208,620	18%
Cost of goods sold	834,480	72%
Total	1,159,000	100%

Journal Entry

General Journal	Debit ($)	Credit($)
Work in process (10%*165,000)	16,500
Finished goods (18%*165,000)	29,700
Cost of goods sold (72%*165,000)	118,800
Manufacturing overhead		165,000

4.

Cost of goods sold if the underapplied overhead is closed directly to cost of goods sold (1,353,600 + 165,000)	1,518,600
Cost of goods sold if the underapplied overhead is allocated among the accounts (1,353,600 +834,480)	2,188,080
Difference in cost of goods sold	669,480

Thus, net operating income will be $669,480 greater if the underapplied overhead is allocated among work in process, finished goods, and cost of goods sold rather than closed directly to cost of goods sold.