Luzadis Company makes furniture using the latest automated technology. The compa
ID: 2330198 • Letter: L
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 $1,066,000 of total manufacturing overhead for an estimated activity level of 82,000 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 68,000
Manufacturing overhead cost $ 1,029,000
Inventories at year-end: Raw materials $ 17,000
Work in process (includes overhead applied of $88,400) $ 192,000
Finished goods (includes overhead applied of $132,600) $ 288,000
Cost of goods sold (includes overhead applied of $663,000) $ 1,440,000
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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
3. Assume that the company allocates any underapplied or over appliedoverhead 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.)
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?
Explanation / Answer
Req 1. Pre-determined OH rate: Estimated Manufacturing Overheads 1066000 Divide: Estimated Machine Hours 82000 OH rate per MH 13 Under/ Over applied OH: Manufacturing OH incurred 1029000 Less: manufacturing OH applied 884000 (68000 MH @ 13 per MH) OH under applied 145000 Req 2. Journal entry for under-applied OH: Accounts title and explanation Debit $ Credit $ Cost of Goods sold Account Dr. 145000 Manufacturing Overheads account 145000 Req 3. Inventories Ending Bal. Proportion Under-applied Oh OH charged WIP 192000 10% 145000 14500 FG 288000 15% 145000 21750 COGS 1440000 75% 145000 108750 Total 1920000 100% 145000 Journal entry for under-applied OH: Accounts title and explanation Debit $ Credit $ Work in process inventory Dr. 14500 Finished Goods Inventory Dr. 21750 Cost of Goods sold Dr. 108750 Manufacturing Overheads 145000 Req 4. Effect on Profits: Income increase for increase in WIP 14500 Income increase for increase in FG 21750 Income decrease for increase n COGS -108750 Net decrease in Income -72500 Net decrease in Income -145000 Income increases by 72500 The income increased by $ 72500 for applying the under-applied OH to WIP, Fg and COGS rather than COGS alone.
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