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 $765,000 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 Manufacturing overhead cost Inventories at year-end: 69,000 $ 719,000 Raw materials Work in process (includes overhead applied of $62,100) Finished goods (includes overhead applied of $105,570) $ 14,000 $ 183,000 $ 311,100 $1,335,900 Cost of goods sold (includes overhead applied of $453,330) 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

Predetermine overhead rate = 765000/85000 = 9 per machine hour

1) Applied overhead = 69000*9 = 621000

Actual overhead = 719000

Under applied overhead = 621000-719000 = 98000

2) Journal entry :

3) Journal entry :

4) Net operating income will increase by (98000-71540) = 26460

Date	accounts & explanation	debit	credit
	Cost of goods sold	98000
	Manufacturing overhead		98000
	(To close under applied overhead)