Luzadis Company makes furniture using the latest automated technology. The compa

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 $980,000 of total manufacturing overhead for an estimated activity level of 98,000 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: 78,000 $941,08e $15,000 Work in process (includes overhead applied of $39,000) 97,580 Finished goods (includes overhead applied of $117,900) 292,500 Cost of goods sold (includes overhead applied of $624,000) $1,560,00e Raw materials 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

Req 1: Pre-determined OH rate: Estimated Overheads/ Estimated Labour hours $ 980,000 /98,000 labour hours= $ 10 per labour houor Under/Over-applied overheads: Overheads incurred 941000 Overheads applied (78000 DLH @10) 780000 Under-Applied 161000 Req 2: Journal Entry: Cost of Goods sold Dr. 161000       Manufacturing Overheads 161000 Req 3: Allocation of Under-aplied Overheads Inventory Total OH applied % OH applied Under-applied OH allocated WIP 39000 5% 8050 Finished Goods 117000 15% 24150 Cost of Goods sold 624000 80% 128800 Total 780000 100% 161000 Journal entry: Work in procecss Inventory Dr. 8050 Finished Goods inventory Dr. 24150 Cost of Goods sold Dr. 128800         Manufacturing Overheads 161000 Req 4: EFFECT ON NET INCOME: When under-applied charged to COGS: Net income decreases by: 161000 When Under-applied charged to Inventories WIP: $ 8050. Net Income increase by 8050 FG: $ 24150. Net Income increase by 24150 COGS: 128800. net Income decrease by 128800 Net Decrease in income 96600 Net Income will be higher by (when allocation being done) 64400

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