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 $1,615,000 of total manufacturing overhead for an estimated activity level of 85,000 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		77,000
Manufacturing overhead cost	$	1,574,000
Inventories at year-end:
Raw materials	$	14,000
Work in process (includes overhead applied of $73,150)	$	94,000
Finished goods (includes overhead applied of $277,970)	$	357,200
Cost of goods sold (includes overhead applied of $1,111,880)	$	1,428,800

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?

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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

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.)

Compute the underapplied or overapplied overhead.

	Underapplied overhead cost $111,000

No	Event	General Journal	Debit	Credit
1	1	Cost of goods sold	111,000
		Manufacturing overhead		111,000

No	Event	General Journal	Debit	Credit
1	1	Work in process	?
		Finished goods		?
		Cost of goods sold		?

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?

	Net operating income will be ? greater if the underapplied overhead is allocated rather than closed entirely to cost of goods sold.

Answer 1