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 $880,000 of total manufacturing overhead for an estimated activity level of 88,000 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		79,000
Manufacturing overhead cost	$	836,000
Inventories at year-end:
Raw materials	$	15,000
Work in process (includes overhead applied of $71,100)	$	171,900
Finished goods (includes overhead applied of $134,300)	$	324,700
Cost of goods sold (includes overhead applied of $584,600)	$	1,413,400

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
		880,000/88,000
		10	Mh's
	Applied overhead		(10*79000 Actual mhs')=			790000
	Actual manufacturing overhead					836,000
	Under Applied overhead					46,000	Answer
Requirement 2
	Event	General Journal			Debit	Credit
		Cost of goods sold			46,000
		Manufacturing overhead				46,000
Requirement 3
	Event	General Journal			Debit	Credit
		work in process inventory			4,140
		finished goods inventory			7,820
		cost of goods sold			34,040
		Manufacturing overhead				46,000
		Work in process			171,900	9%
		Finished goods			324,700	17%
		Cost of goods sold			1,413,400	74%
		total			1,910,000
	4)	net income will be higher			11,960	if the	underapplied
		overhead is allocated rather than closed entirely to cost of goods sold