Savallas Company is highly automated and uses computers to control manufacturing

Question

Savallas Company is highly automated and uses computers to control manufacturing operations. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of computer-hours. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year:

    During the year, a severe economic recession resulted in cutting back production and a buildup of inventory in the company%u2019s warehouse. The company%u2019s cost records revealed the following actual cost and operating data for the year:

1. Compute the underapplied or overapplied overhead for the year.

2. Assume the company closes any underapplied or overapplied overhead directly to cost of goods sold. Prepare the appropriate entry.

3. How much higher or lower will net operating income be for the year if the underapplied or overapplied overhead is allocated rather than closed directly to cost of goods sold?

     Computer-hours 85,000   Fixed manufacturing overhead cost $ 1,275,000   Variable manufacturing overhead per computer-hour $ 3.00

Explanation / Answer

It looks like they "wsfgke" answered the wrong question...

1. $270,000 Underapplied (1275000/85000=$15/computer hr. ----> 15+3=18 ----> $18*60000=$1,080,000 ---->

                                            1,350,000-1,080,000=$270,000)

2. CoGS        270,000

            MOH              270,000

3. $196,400 (The portion allocated to various inventories [98,200] will be doubled since the amount is being converted

                     from an expense to an asset)

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