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) Cost of goods sold 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

Computation of Underapplied/ OverApplied Overhead
Actual Manufacturing Overhead cost (A)	$850,000.00
Applied Manufacturing Cost (B) (60000Mhours X $12)	$720,000.00
Under-applied manufacturing overhead (A-B)	$130,000.00

W/ No-1 Predetermined overhead rate = Total Manufacturing Overhead / Estimated Machine Hour = $900,000 / 75,000 = $12/ Machine Hour

Computation of Underapplied/ OverApplied Overhead
Actual Manufacturing Overhead cost (A)	$850,000.00
Applied Manufacturing Cost (B) (60000 Mhours X $12)	$720,000.00
Under-applied manufacturing overhead (A-B)	$130,000.00

2. Journal Entry
Account Tittle & Explanation	Debit	Credit
Cost of goods sold	130,000
Manufacturing overhead		130,000
To Record booked Under applied Overhead

Working Note Computation of Overhead Applied during the year
	Amount	Percent (%)
Work in process	36,000	5%
Finished goods	180,000	25%
Cost of goods sold	504,000	70%
Total	720,000	100%

part-3 Journal Entry
Account Tittle & Explanation	Debit	Credit
Work in process (5%*130,000)	6,500
Finished goods (25%*130,000)	32,500
Cost of goods sold (70%*15,000)	91,000
Manufacturing overhead		130,000

Part-4
Revised cost of Goods Sold ( if underapplied Closed to COGS (1400000+130000)	1,530,000
Cost of goods sold (if the underapplied overhead is allocated among the accounts) (1400000 +91000)	1,491,000
Net Income will be increased by	39,000