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

Calculation of Predetermined Rate :-

= Estimated total Manufacturing Overhead / Estimated Total Machine Hours

= $1520000 / 76000 H

= $20 per hour

1) Calculation of Underapplied or Overapplied Overhead :-

= Actual Overhead - (Predetermined Overhead Rate * Actual Hours)

= $1471000 - ($20 * 64000 H)

= $1471000 - $1280000

= $191000 Underapplied

2) Journal Entry :-

Particulars	Debit($)	Credit($)
Cost of Goods Sold A/c Dr.	191000
To Manufacturing Overhead A/c		191000
(To Record Underapplied Manufacturing Overhead)

3) Journal Entry :-

Particulars	Debit($)	Credit($)
Work in Process A/c Dr.	9550
Finished Goods A/c Dr.	30560
Cost of Goods Sold A/c Dr.	150890
To Manufacturing Overheads A/c		191000

Underapplied Overhead Share:-

Particulars	Overhead Applied	%	Underapplied Overhead Share(Underapplied Overhead * %)
Work in Process	$64000	5%	$9550
Finished Goods	$204800	16%	$30560
Cost of Goods Sold	$1011200	79%	$150890
Total	$1280000		$191000

4) Net Operating Income Increase :-

= Overhead Applied to Work in Process + Overheas Applied to Finished Goods

= $9550 + $30560

= $40110