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 following estimates were used in preparing the predetermined overhead rate at the beginning of the year:

Machine-hours		87,000
Fixed manufacturing overhead cost	$	1,272,000
Variable manufacturing overhead per computer-hour	$	3.80

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 cost records revealed the following actual cost and operating data for the year:

Machine-hours		50,000
Manufacturing overhead cost	$	985,000

Required:

1.	Compute the company’s predetermined overhead rate for the year. (Round your answer to 2 decimal places.)

       

2.	Compute the underapplied or overapplied overhead for the year. (Round your intermediate calculations to 2 decimal places.)

       

3.	Assume the company closes any underapplied or overapplied overhead directly to Cost of Goods Sold. Prepare the appropriate entry. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate calculations to 2 decimal places.)

       

Answer 1

(1) Company’s predetermined overhead rate for the year

Predetermined Overhead Rate = Estimated Total Manufacturing Overhead cost / Estimated total machine hours

Estimated Total Manufacturing Overhead cost = $ 1,272,000 + [87,000 Machine hours x $3.80 per machine hour ]

= $ 1,272,000 + $3,30,600

= $16,02,600

Estimated total machine hours = 87,000 Machine hours

Predetermined Overhead Rate = $16,02,600 / 87,000 Machine hours

Predetermined Overhead Rate = $18.42 per machine hour

(2) Under applied overhead for the year

Total manufacturing overhead applied = 50,000 Machine hours x$18.42 = $ 9,21,000

Actual manufacturing overhead cost actually incurred = $9,85,000

Therefore, Under-applied manufacturing overhead = $9,85,000 - $9,21,000 = $64,000

(3) Journal Entry to record under applied overhead directly to Cost of Goods Sold

Particulars	Debit	Credit
Cost of goods sold A/c	$64,000
To Manufacturing overhead A/c		$64,000