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 $980,000 of total manufacturing overhead for an estimated activity level of 98,000 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		78,000
Manufacturing overhead cost	$	941,000
Inventories at year-end:
Raw materials	$	15,000
Work in process (includes overhead applied of $39,000)	$	97,500
Finished goods (includes overhead applied of $117,000)	$	292,500
Cost of goods sold (includes overhead applied of $624,000)	$	1,560,000

Required:

1. Compute the underapplied or overapplied overhead. Underapplied Overhead cost: = $161,000

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

Debit Cost of Goods Sold $161,000, Credit Manufacturing Overhead $161,000

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.

Debit, Work in Process $8,050, Finished Goods $24,150, Costs of Goods Sold $128,800, Credit Manufcturing overhead.

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?

Ner operating income will be $__________ Greater if the underapplied over head

Answer 1

Solution 1:

Manufacturing overhead incurred = $941,000

Overhead applied = $39,000 + $117,000 + $624,000 = $780,000

Underapplied overhead = $941,000 - $780,000 = $161,000

Solution 2:

Adjusting Journal Entries -Luzadis Company
Event	Particulars	Debit	Credit
1	Cost of goods sold Dr	$161,000.00
	To Manufacturing overhead		$161,000.00
	(To record underapplied overhead to COGS)

Solution 3:

Adjusting Journal Entries -Luzadis Company
Event	Particulars	Debit	Credit
1	WIP Dr ($161,000 * $97,500 / $1,950,000)	$8,050.00
	Finished goods inventory Dr ($161,000 * $292,500 / $1,950,000)	$24,150.00
	Cost of goods sold Dr ($161,000 * $1,560000 / $1,950,000)	$128,800.00
	To Manufacturing overhead		$161,000.00
	(To record underapplied overhead to COGS, Ending WIP and material)

Solution 4:

Underapplied overhead allocated to WIP and finished goods inventory = $8,050 + $24,150 = $32,200

Therefore 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, Ner operating income will be $32,200 greater.