Luzadis Company makes furniture using the latest automated technology. The compa
ID: 2331376 • 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 $560,000 of total manufacturing overhead for an estimated activity level of 70,000 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:
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?
Machine-hours 61,000 Manufacturing overhead cost $ 514,000 Inventories at year-end: Raw materials $ 14,000 Work in process (includes overhead applied of $48,800) $ 188,000 Finished goods (includes overhead applied of $92,720) $ 357,200 Cost of goods sold (includes overhead applied of $346,480) $ 1,334,800Explanation / Answer
The predetermined overhead rate was based on a cost formula that estimates $560,000 of total manufacturing overhead for an estimated activity level of 70,000 machine-hours.
= Total Manufacturing overhead / Machine hours = 560,000 / 70000 = 8 per hour
Required - 1
Underabsorbed Overhead = Overhead incurred - Overhead applied
= 514000 - ( 61000 * 8 per hour) = 514000 - 488,000 = 26000
Required - 2
Previously, we have overhead of 488,000 being included in cost of goods sold. Above entry will adjust the cost of goods sold to its true value.
Requirement - 3
In this model, adjustment to cost of goods sold shall be proportionate. Thus some part of the overhead is shared to WIP and Finished goods ........ i.e Inventory.
Required - 4
Amount of profit shall be higher by 7540
Under applied overhead which is debited to WIP and FG Shall be carried forward to next accounting period. Thus instead of total being debited to cost of goods sold, only a portion of under absorption is debited, thus decrease in cost and increase in profit if we compare with the practice of adjustment only to cost of goods sold.
Debit Credit Cost of goods sold 26000 Manufacturing Overhead 26000Related Questions
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