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 $612,000 of total manufacturing overhead for an estimated activity level of 68,000 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		50,000
Manufacturing overhead cost	$	570,000
Inventories at year-end:
Raw materials	$	18,000
Work in process (includes overhead applied of $22,500)	$	93,500
Finished goods (includes overhead applied of $76,500)	$	317,900
Cost of goods sold (includes overhead applied of $351,000)	$	1,458,600

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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

3. Assume that the company allocates any underapplied or over appliedoverhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. Prepare the appropriate journal entry. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

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

Solution 1:

Predetermined overhead rate = Estimated manufacturing overhead / Estimated machine hours

= $612,000 / 68000 = $9 per machine hour

Overhead applied = Actual machine hours * Overhead rate = 50000*$9 = $450,000

Actual overhead incurred = $570,000

Underapplied overhead = Actual overhead - Applied overhead = $570,000 - $450,000 = $120,000

Solution 2:

Luzadis Company
Journal Entries
Event	Particulars	Debit	Credit
1	Cost of goods sold Dr	$120,000.00
	To Manufacturing overhead		$120,000.00
	(To closed underapplied overhead to COGS)

Solution 3:

Allocation of underapplied overhead
Particulars	Unadjusted Balance	% Allocation	Allocated amount	Adjusted Balance
Ending Work In Process	$93,500	5.0%	$6,000.00	$99,500.00
Ending finished goods inventory	$317,900	17.0%	$20,400.00	$338,300.00
Cost of goods sold	$1,458,600	78.0%	$93,600.00	$1,552,200.00
Total	$1,870,000.00		$120,000.00	$1,990,000.00

Luzadis Company
Journal Entries
Event	Particulars	Debit	Credit
1	Work in Proces Dr	$6,000.00
	Finished goods inventory Dr	$20,400.00
	Cost of goods sold Dr	$93,600.00
	To Manufacturing overhead		$120,000.00
	(To close underapplied overhead)

Solution 4:

Net operating will be higher by = $120,000 - $93,600 = $26,400 if he 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.