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 $900,000 of total manufacturing overhead for an estimated activity level of 75,000 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: 60,000 $850,eee Raw materials Work in process (includes overhead applied of $36,000) Finished goods (includes overhead applied of $180,eee) $30,e00 $ 100,eee $ 5ee,90e $ 1,400, eee Cost of goods sold (includes overhead applied of $504,e0e) 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

Solution 1:

Predetermined overhead rate = Estimated Manufacturing overhead / Estimated Machine Hours

= 900,000/75,000 = $12

Actual Manufacturing Overhead = $850,000

Applied Overhead = $36,000 +$180,000 + $ 504,000 = $720,000

Underapplied Overhead = Actual Manufacturing overhead - Applied Overhead = $850,000-$720,000 = $130,000

Solution 2:

Solution 3:

Solution 4:

Increase in Net Operating Income if underapllied overhead is allocated proportionately to WIP, FG and COGS rather than being closed to COGS = Underapplied overhead allocated to WIP + Underapplied overhead applied to FG

= $6500 +$32500 = $39000

Journal Entries -Luzadis Company Event Particulars Debit Credit 1 Cost of goods sold Dr $130,000.00                To Manufacturing overhead $130,000.00 (To record underapplied overhead to COGS)

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