Luzadis Company makes furniture using the latest automated t

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 Manufacturing overhead cost Inventories at year-end: 60, 000 $850, 000 Raw materials Work in process (includes overhead applied of $36, 000) Finished goods (includes overhead applied of $180, 000) 30, 000 $100, 000 $ 500, 000 S 1, 400, 000 Cost of goods sold (includes overhead applied of $504, 000) 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?

Solution

Estimated total Mfg.OH 900000 Estimated machine hrs. 75000 So,predetermined OH rate=900000/75000= 12 1… Actual Mfg. OH incurred 850000 Mfg. OH applied(60000*12) 720000 So, Mfg. OH under-applied(850000-720000)= 130000 ANSWER: Under-applied   OH 130000 2.. COGS 130000 Mfg. OH 130000 3… Already applied Proportionate Addtion of Under-applied OH(130000) Work in process 36000 36000/720000*130000= 6500 Finished goods 180000 180000/720000*130000= 32500 COGS 504000 504000/720000*130000= 91000 Total 720000 130000 Journal entry will be Work in process 6500 Finished goods 32500 COGS 91000 Mfg. OH 130000 4… Net operating income will be higher by (130000-91000)=39000 when under-applied Mfg. OH is proportionated to WIP, fin.gds.& COGS(as in 3 .) rather than closing fully to COGS (as in ans. 2)