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 $592,000 of total manufacturing overhead for an estimated activity level of 74,000 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 67,000

Manufacturing overhead cost $ 551,000

Inventories at year-end: Raw materials $ 13,000

Work in process (includes overhead applied of $37,520) $ 139,300

Finished goods (includes overhead applied of $101,840) $ 378,100

Cost of goods sold (includes overhead applied of $396,640) $ 1,472,600

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?

Answer 1

Requirement 1
	overhead rare = Estimated MOH/Estimated MH's
		592,000/74000
		8	Mh's
	Applied overhead		(8*67000 Actual mhs')=			536000
	Actual manufacturing overhead					551,000
	Under Applied overhead					15,000	Answer
Requirement 2
	Event	General Journal			Debit	Credit
		Cost of goods sold			15,000
		Manufacturing overhead				15,000
Requirement 3
	Event	General Journal			Debit	Credit
		work in process inventory			1,050
		finished goods inventory			2,850
		cost of goods sold			11,100
		Manufacturing overhead				15,000
		Allocation
		Work in process = 139300/(139300+378100+1,472,600)
				7%
		finished goods = 139300/(139300+378100+1,472,600)
				19%
		cost of goods sold=		74%
		hence allocated amount in terms of percentage
		WIP	15000*7%		1050
			15000*19%		2850
			15000*74%		11100
	4)	net income will be higher			3,900	if the	underapplied
		overhead is allocated rather than closed entirely to cost of goods sold