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 $612,000 of total manufacturing overhead for an estimated activity level of 68,000 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 60,000
Manufacturing overhead cost $850,000
Inventories at year-end:
Raw materials $30,000
Work in process (includes overhead applied of $36,000) $100,000
Finished goods (includes overhead applied of $180,000) $500,000
Cost of goods sold (includes overhead applied of $504,000) $1,400,000

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?

Answer 1

Answer:

a) 130,000 underapplied

b) COGS   130,000 debit

        Manufacturing Overhead   130,000 credit

c)

COGS                  91,000

Finished Goods 32,500

WIP inventory       6,500

         Manufacturing Overhead   130,000 credit

Explanation:

Adding the MO on each category we can detemrinate the applied overhead:

504,000 + 180,000 + 36,000 = 720,000

Actual overhead 850,000

As it is higher than applied we faced an underapplied overhead of 130,000

b) to amend we increase COGS and the applied overhead to match the actual numbers

c) proportional:

720,000 has 130,000 underapplied --> 130,000 / 720,00 = 0.1805555

504,000 has 504,000 x 0.1805555   =  91,000

180,000  has 504,000 x .01805555   = 32,500

36,000   has  36,000 x 0.18055555   =   6,500