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: Machine-hours Manufacturing overhead cost Inventories at year-end: 60,000 850,000 Raw materials Work in process (includes overhead applied of $36,000) Pinished goods (includes overhead applied of $180,000) $ 30,000 100,000 $500,000 1,400,000 Cost of goods sold (includes overhead applied of $504,000)

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

Requirement 1 Step 1 Calculate predetermined overhead rate as follows Estimated total manufacturing overheads costs (A) Estimated machine-hours (B) Predetermined overhead rate (A B) S900,000 75000 S12 Therefore, predetermined overhead rate is $12 Step 2 Calculate manufacturing overhead applied as follows Predetermined overhead rate (A) Actual machine hours (B) Manufacturing overhead applied (A x B) $12 60000 $720,000 X $720,000 Therefore, manufacturing overhead applied are Step 3 Calculate underapplied overheads as follows: Manufacturing overhead applied (A) Actual Manufacturing overhead (B) Underapplied overhead (A- B) $720,000 S850,000 $130,000 Therefore, underapplied overhead is $130,000. Note Since manufacturing overhead applied is less than the actual manufacturing overhead, it is the case of underapplied overheads Requirement 2:

Account Title and Explanation Date Debit Credit Cost of goods sold $130,000 Manufacturing overhead S130,000 (To record underapplied overhead to Cost of Goods Sold) Requirement 3: Prepare the journal entry as follows: Account Title and Explanation Credit Date Debit |Work-in-process (S36,000 S720,000) x S130,000 |Finished goods ( $180,000 $720,000) x $130,000 Cost of goods sold ($504,000 S720,000) x $130,000 Manufacturing overhead (To record manufacturing overheads and apportioned |propotionally) $6,500 S32,500 $91,000 $130,000 Requirement 4: Net operating income will be higher if the under applied overhead is allocated to Work in Process, Finished Goods, and Cost of Goods Sold rather than being closed to Cost of Goods Sold Calculate the amount by which net income will be higher as follows: Increase in net income = S32,500 S6,500 = $39,000 Therefore, Net operating income will be higher if the under applied overhead is allocated to Work in Process, Finished Goods, and Cost of Goods Sold rather than being closed to Cost of Goods Sold by $39,000