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 $680,000 of total manufacturing overhead for an estimated activity level of 85,000 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: 76,000 Raw materials Work in process (includes overhead applied of $36,480) Finished goods (includes overhead applied of $91,200) $ 637,000 $ 20,000 $115,800 $ 289,500 $1,524,700 Cost of goods sold (includes overhead applied of $480,320) 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 Required Required Required 1 2 3 4 Compute the underapplied or overapplied overhead < Required 1 Required 2

Answer 1

Estimated manufacturing overhead	680000
Divide by Estimated machine hours	85000
Overhead rate	8
X Actual machine hours	76000
Overhead applied	608000
1
Actual manufacturing overhead	637000
Less: Overhead applied	608000
Underapplied overhead	29000
2
	Debit	Credit
Cost of goods sold	29000
Manufacturing Overhead		29000
3
Work in Process	1740		=29000*36480/608000
Finished goods	4350		=29000*91200/608000
Cost of goods sold	22910		=29000*480320/608000
Manufacturing Overhead		29000
4
Difference in net operating income	6090		=29000-22910
Net operating income will be $6090 higher, if the underapplied overhead is allocated rather than closed entirely to cost of goods sold