Luzadis Company makes furniture using the latest automated technology. The compa
ID: 2588233 • 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 $1,332,000 of total manufacturing overhead for an estimated activity level of 74,000 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:
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?
Machine-hours 62,000 Manufacturing overhead cost $ 1,300,000 Inventories at year-end: Raw materials $ 20,000 Work in process (includes overhead applied of $100,440) $ 176,400 Finished goods (includes overhead applied of $223,200) $ 392,000 Cost of goods sold (includes overhead applied of $792,360) $ 1,391,600Explanation / Answer
1.
2.
3.
Workings:
4. Cost of goods sold overhead portion treated as expense in income statement where as WIP and finished goods portion will carry in balancesheet.
The amount net income higher will the portion of overhead carried to balancesheet for WIP and finished goods which is= 16560+36800= 53360
Operating income will be higher by 53360
A Overhead applied OH recovery rate = Estimated OH/ Estimated Machine hours 1332000/74000 18 Per Machine hour OH applied Inventory Amount WIP 1,00,440 Finished goods 2,23,200 Cost of goods sold 7,92,360 Total 11,16,000 B Overhead incurred: 13,00,000 C a Overhead incurred 13,00,000 b Overhead applied 11,16,000 c=a-b Under/(over) applied OH 1,84,000 As OH applied is less than OH incurred, OH is under appliedRelated Questions
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