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 $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: Machine-hours Manufacturing overhead cost Inventories at year-end: 61,000 514,8ee Raw materials $14,0ee 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 $346,488) $1,334,800 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? Complete this question by entering your answers in the tabs below.

Explanation / Answer

Req 1 Pre-determined OH rate based on machine hours: Estimated OH/ Estsimated machine hours 560,000 /70,000 = $ 8 per MH Under/Over-applied Overheads: Overheads incurred 514800 Less: Overheads applied (61000 MH @$8 per MH) 488000 Under-applied Overheads 26800 Req 2: Journal Entry for under-applied Overheads: Cost of Goods sold Dr. 26800       Manufacturing Overheads Account 26800 Req 3: Under-applied OH allocation Item: OH applied % of Allocation Under-applied OH OH allocated WIP 48800 10% 26800 2680 Finished Goods 92720 19% 26800 5092 COGS 346488 71% 26800 19028 Total 488008 100% 26800 Journal entry: Cost of Goods sold Dr. 19028 Work in process Dr. 2680 Finished Goods dr. 5092     Manufacturing Overheads 26800 Req 4: Net effectc on Income in Req-3: Debited to COGS (Net income decrease) -19028 Debited to Finished Goods(Net income increasse) 5092 Debited to WIP (net income increasse) 2680 Net Income decrease by (net) -11256 As per req-2 Net income decrease by -26800 Higher income will be shown in Req-3 15544

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