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 $1,207,000 of total manufacturing overhead for an estimated activity level of 71,000 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		55,000
Manufacturing overhead cost	$	1,169,000
Inventories at year-end:
Raw materials	$	11,000
Work in process (includes overhead applied of $46,750)	$	100,000
Finished goods (includes overhead applied of $187,000)	$	400,000
Cost of goods sold (includes overhead applied of $701,250)	$	1,500,000

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. (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 applied overhead 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

Ohh rate perr MH:
Total Manufacturing Overheads			1207000
Divide: Machine hours			71000
OH rate per MH			17
Under/ over applied overheads:
Actual OH incurred			1169000
OH applied			935000
Under-applied Overheads			234000
Req 2.
Journal entry:
Cost of goods sold Dr.			234,000
Manufacturing overheads				234000
Req 3.
Allocation of under-applied OH:
Item		Balance	% of total	Under-applied OH		Allocated OH
WIP		100000	5%	234000		11700
FG		400000	20%	234000		46800
COGS		1500000	75%	234000		175500
		2000000	100%	234000		234000
Work in process inventory Dr.				11700
Finished Goods inventory Dr.				46800
Cost of goods sold Dr.				175500
Manufacturing overheads					234000
Req 4.
Items			Effect on Profits:
Increase in WIP			11700
Increase in FG			46800
Increase in COGS			-175500
Net decrease in Profits				-117000
Net Decrease in profits in (b)				-234000
Net income higher by				117000