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 $900,000 of total manufacturing overhead for an estimated activity level of 75,000 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		60,000
Manufacturing overhead cost	$	850,000
Inventories at year-end:
Raw materials	$	30,000
Work in process (includes overhead applied of $36,000)	$	100,000
Finished goods (includes overhead applied of $180,000)	$	500,000
Cost of goods sold (includes overhead applied of $504,000)	$	1,400,000

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?

Must be OVERAPPLIED!! It's not UNDERAPPLIED

Thank you!!! I won't forget to rate!

Answer 1

Hi,

It is given in question that the pre-determined overhead rate= Total Estimated Manufacturing Overhead/ Machine hours at expected level of activity.

Pre- determined overhead rate= 9,00,000$/ 75,000 Machine Hours = 12$ per Machine Hour.

Answer 1 : Calculation of Overhead Applied:

Actual Machine Hours		60,000 Machine Hours
Pre Determined Overhead Rate (12$ per Machine Hour)	(60,000*12 $)
Total Manufacturing Overhead Applied from above calculation		7,20,000 $
Actual Manufacturing Overhead Cost		8,50,000 $
Underapplied Manufacturing Overhead		1,30,000 $

Answer 2 : Journal Entry where company closes under applied /over applied overhead cost to Cost of Goods Sold

Date	Journal	Debit	Credit
	Cost of Goods Sold Account	1,30,000 $
	Manufacturing Overhead		1,30,000 $
	(To record under applied overhead cost as derived in answer 1)

Answer 3 : Journal Entry assuming company closes underapplied overhead proportionately to Work In Progrees, Finished Goods and Cost of Good Sold

Overhead Applied	Amount	Proportion
Work In progress	36,000 $	5%
Finished Goods	1,80,000 $	25%
Cost of Good Sold	5,04,000 $	70%
Total	7,20,000 $

Date	Journal	Debit	Credit
	Work in Progress (1,30,000$ *5%)	6,500 $
	Finished Goods (1,30,000$ * 25%)	32,500 $
	Cost of Good Sold (1,30,000 $* 70%)	91,000 $
	Manufacturing Overhead		1,30,000 $
	(To record under applied overhead proportionately to Work in progress, Finished Goods and Cost of good Sold)

Answer 4: Comparing the two method :

Cost of Good Sold (where under applied overhead closes to Cost of Good Sold)

14,00,000 $(given in question) + 1,30,000 = 15,30,000 $ (A)

Cost of Good Sold (where under applied overhead closes proportionately to work in progress, finished goods and cost of good sold)

14,00,000 $ +91,000$ = 14,91,000$ (B)

Difference in Cost of Good Sold : 39,000$ (A-B)

Hence , net operating income will increase by 39,000 $ if we closes under applied overhead proportionately in work in progress, finished goods and cost of good sold.

Hope , you find the answer helpful in your studies.

Thank You.