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 $1,332,000 of total manufacturing overhead for an estimated activity level of 74,000 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		62,000
Manufacturing overhead cost	$	1,300,000
Inventories at year-end:
Raw materials	$	20,000
Work in process (includes overhead applied of $100,440)	$	176,400
Finished goods (includes overhead applied of $223,200)	$	392,000
Cost of goods sold (includes overhead applied of $792,360)	$	1,391,600

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 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

Required 1.

Underapplied Overhead

$184,000

Explanation:-

Overhead rate = Estimated Manufacturing Overhead/ Estimated Machine hours

Overhead rate = $1,332,000/74,000

Overhead rate = $18

Overhead applied = Actual Machine hours × Overhead rate

Overhead applied = 62,000 × $18

Overhead applied = $1,116,000

Actual Manufacturing Overhead	$1,300,000
Less: Overhead applied	($1,116,000)
Underapplied Overhead	$184,000

Required 2

Event	General Journal	Debit	Credit
1	Cost of goods sold	$184,000
	Manufacturing overhead		$184,000
	(To record underapplied Overhead)

Required 3

Event	General Journal	Debit	Credit
1	Work in Process [($184,000 × $100,440)/$1,116,000]	$16,560
	Finished Goods [($184,000 × $223,200)/$1,116,000]	$36,800
	Cost of goods sold ($184,000 × $792,360)/$1,116,000)	$130,640
	Manufacturing Overhead		$184,000
	(To record underapplied overhead)

Note) $100,440 + $223,200+ $792,360 = $1,116,000

Required 4

Net Operating income will be $53,360 higher, if the underapplied overhead is allocated rather than closed entirely to cost of goods sold.

Explanation:-

$184,000 - $130,640 = $53,360