Question

Luzadis Company makes furniture using the latest automated technology. The company uses job-order costing system and applies manufacturing overhead cost to products on the basis of machine-hours. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year.

Machine Hours:     75,000

Fixed Manufacturing overhead Cost   $795,000

Variable manufacturing overhead per computer-hour    $1.40

During the year, a glut of furniture on the market resulted in cutting back production and a buildup of furniture in the company’s warehouse. The company’s costs records revealed the following actual cost and operating data for the year:

Machine Hours:    60,000

Manufacturing overhead cost:    $850,000

Inventories at year end:

Raw Materials: $30,000

Work in process (Includes overhead applied of 36,000)   $100,000

Finished Goods (Includes overhead applied of 180,000)   $500,000

Cost of goods sold (Includes overhead applied of 504,000)   $1,400.000

1.       Compute the company’s predetermined overhead rate.

2.       Compute the underapplied or overapplied overhead

3.       Assume that the company closes any underapplied of overapplied overhead directly to Cost of Goods Sold. Prepare the appropriate journal entry.

4.       Assume that the company allocates any underapplied or overapplied overhead to Work in Process, Finished Goods, and Cost of Goods Sold on the basis of the amount of overhead that remains in each account at the end of the year. Prepare the journal entry to show the allocation for the year.

5.       How much higher or lower will net operating income be if the underapplied or overapplied overhead is allocated rather than closed directly to Cost of Goods Sold?

Answer 1