Question

In: Accounting

Luzadis Company makes furniture using the latest automated technology. The company uses a job-order costing system...

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 $1,368,000 of total manufacturing overhead for an estimated activity level of 72,000 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

61,000

Manufacturing overhead cost

$

1,324,000

Inventories at year-end:

Raw materials

$

16,000

Work in process (includes overhead applied of $115,900)

$

188,000

Finished goods (includes overhead applied of $208,620)

$

338,400

Cost of goods sold (includes overhead applied of $834,480)

$

1,353,600

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?

Solutions

Expert Solution

1. Compute the underapplied or overapplied overhead.

Ovehread rate =1,368,000/72000 19 Per MH
Machine-hours
61000
Ovehread applied 61000*19 ………….A 1159000
Actual Manufacturing overhead cost…….B
1324000
underapplied Overhead (B-A) 165000

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

DR CR
Cost of goods Sold 165000
Maufacturing Overhead 165000

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.

DR CR
Work in Progress 16500
Finished goods 29700
Cost of goods sold 118800
Maufacturing Overhead 165000
Weight
115900 10.00% 16500
208620 18.00% 29700
834480 72.00% 118800
1159000

ow 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?

=16500-29700

=$46200


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