Luzadis Company makes furniture using the latest automated technology. The compa
ID: 2396336 • 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 $520,000 of total manufacturing overhead for an estimated activity level of 65,000 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: 54,000 $ 488,000 Raw materials Work in process (includes overhead applied of $25,920) Finished goods (includes overhead applied of $73,440) $ 19,000 $ 117,000 $ 331,500 $ 1,501,500 Cost of goods sold (includes overhead applied of $332,640) 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?Explanation / Answer
1. Underapplied overhead: $56000
Predetermined overhead rate = $520000/65000 machine hours = $8 per machine hour
Manufacturing overheads applied = 54000 x $8 = $432000
Manufacturing overhead cost incurred = $488000
Underapplied overhead = $488000 - $432000 = $56000
2.
3.
Working:
4. Net operating income will be higher by $12880 if the underapplied overhead is allocated rather than closed entirely to cost of goods sold.
If the underapplied overhead is allocated, the net operating income will be higher to the extent of the underapplied overheads deferred in the work in process and finished goods inventory. Thus, it will be higher by $3360 + $9520 = $12880.
Event General Journal Debit Credit 1 Cost of goods sold 56000 Manufacturing overhead 56000 (To close underapplied overhead to cost of goods sold)Related Questions
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