Luzadis Company makes furniture using the latest automated technology. The compa
ID: 2562045 • Letter: L
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 $880,000 of total manufacturing overhead for an estimated activity level of 88,000 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 vear-end: 79,000 $836,000 Raw materials Work in process (includes overhead applied of $71,100) Finished goods (includes overhead applied of $134,300) $15,000 171,900 $ 324,700 1,413,400 Cost of goods sold (includes overhead applied of $584,600) 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 3. Assume that the company allocates any underapplied or over appliedoverhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. Prepare the appropriate journal entry. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 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
1. Predetermined overhead rate = Total Budgeted Manufacturing Overhead / Budgeted Number of Machine Hours = $ 880,000 / 88,000 = $ 10 per machine hour.
Manufacturing overhead applied = Actual Machine Hours x Predetermined Overhead Rate = 79,000 x $ 10 = $ 790,000.
Overhead overapplied ( underapplied) = Manufacturing Overhead Applied - Manufacturing Overhead Incurred = $ 790,000 - $ 836,000 = $ ( 46,000)
Therefore, overhead underapplied = $ 46,000.
2. Adjusting entry for closing out underapplied manufacturing overhead balance to cost of goods sold :
3. Journal entry for allocating underapplied manufacturing overhead :
4. Net operating income will be higher by $ 11,960, if the underapplied overhead is allocated rather than closed entirely to cost of goods sold.
Event General Journal Debit Credit $ $ 1 Cost of Goods Sold 46,000 Manufacturing Overhead 46,000Related Questions
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