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 $1,520,000 of total manufacturing overhead for an estimated activity level of 76,000 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 64,000 Manufacturing overhead cost $ 1,471,000 Inventories at year-end: Raw materials $ 14,000 Work in process (includes overhead applied of $64,000) $ 90,500 Finished goods (includes overhead applied of $204,800) $ 289,600 Cost of goods sold (includes overhead applied of $1,011,200) $ 1,429,900 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 appliedoverhead 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

1	Total manufacturing overheads	1520000
	Direct labor hours	76000
	Predtermined overhead rate	20	(1520000/76000)
	Machine hour	64000
	Predtermined overhead rate	20
	Manufacturing overhead applied	1280000
	Actual manufacturing overheads	1471000
	Manufacturing overheads underapplied	191000	(1471000-1280000)
2	Cost of goods sold	191000
	Manufacturing overheads		191000
3	Manufacturing overheads applied		%
	Work in progress	64000	5%
	Finished goods inventory	204800	16%
	Cost of goods sold	1011200	79%
	Total	1280000
	Work in progress	9550	(191000*5%)
	Finsihed goods inventory	30560	(191000*16%)
	Cost of goods sold	150890	(191000*79%)
	Manufacturig overheads		191000
4
	Net operating income will be higher by	40110	(191000-150890)