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		83,000
Fixed manufacturing overhead cost	$	1,278,000
Variable manufacturing overhead per computer-hour	$	3.50

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	$	1,011,000
Inventories at year-end:
Raw materials	$	450,000
Work in process (includes overhead applied of 56,700)	$	160,000
Finished goods (includes overhead applied of 189,000)	$	1,010,000
Cost of goods sold (includes overhead applied of 699,300)	$	2,750,000

Required:

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

Predetermined overhead rate __________

       

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.)

       

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 applied during the year that remains in each account at the end of the year. These amounts are $56,700 for work in process, $189,000 for finished goods, and $699,300 for cost of goods sold. Prepare the journal entry to show the allocation for the year. (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.)

       

5.	How much higher or lower will net operating income be for the year if the underapplied or overapplied overhead is allocated rather than closed directly to Cost of Goods Sold? (Round your intermediate calculations to 2 decimal places.)

  net operating income will be_____ if the ___________

Answer 1

1. Predetermined overhead rate = [($1278000/83000 machine hours) + $3.50] = $15.40 + $3.50 = $18.90 per machine hour

2.

Manufacturing overhead cost incurred $	1011000
Manufacturing overheads applied (50000 x $18.90)	945000
Underapplied overheads $	66000

3.

Event	General Journal	Debit	Credit
1	Cost of goods sold	66000
	Manufacturing overhead		66000
	(To close underapplied overhead)

4.

Event	General Journal	Debit	Credit
1	Work in process	3960
	Finished goods	13200
	Cost of goods sold	48840
	Manufacturing overhead		66000
	(To close underapplied overhead)

Working:

	Overheads applied	% of total applied	Underapplied overheads allocated
Work in process	56700	6.0%	3960
Finished goods	189000	20.0%	13200
Cost of goods sold	699300	74.0%	48840
Total $	945000	100.0%	66000

5. Net operating income will be higher by $17160 if the underapplied overhead is allocated rather than closed entirely to cost of goods sold.

If the underapplied overhead is allocated, the net operating income will be higher to the extent of the underapplied overheads deferred in the work in process and finished goods inventory. Thus, it will be higher by $3960 + $13200 = $17160.