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Luzadis Company makes furniture using the latest automated technology. The company uses a job$-$order costing system and applies manufacturing overhead cost to products based on machine$-$hours. The predetermined overhead rate was based on a cost formula that estimates $$1,040,000$ of total manufacturing overhead for an estimated activity level of $80,000$ machine$-$hours.

During the year, a large quantity of furniture on the market caused Luzadis to cut production and build inventories. The company provided the following data for the year:

Machine$-$hours $71,000$

Manufacturing overhead cost $ $990,000$

Inventories at year$-$end:

Raw materials $ $11,000$

Work in process $($includes overhead applied of $$73,840)$ $ $156,000$

Finished goods $($includes overhead applied of $$147,680)$ $ $312,000$

Cost of goods sold $($includes overhead applied of $$701,480)$ $ $1,482,000$

Required:

Compute the underapplied or overapplied overhead.

Assume the company closes underapplied or overapplied overhead to Cost of Goods Sold. Prepare the appropriate journal entry.

Assume the company allocates underapplied or overapplied overhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. Prepare the appropriate journal entry.

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?

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