Luzadis Company makes furniture using the latest automatedtechnology. The company uses a job-order costing system and appliesmanufacturing overhead cost to products on the basis ofmachine-hours. The predetermined overhead rate was based on a costformula that estimates $592,000 of total manufacturing overhead foran estimated activity level of 74,000 machine-hours. During theyear, a large quantity of furniture on the market resulted incutting back production and a buildup of furniture in the company’swarehouse.
The company’s cost records revealed the following actual costand operating data for the year:
Machine-hours 67,000
Manufacturing overhead cost $ 551,000
Inventories at year-end: Raw materials $ 13,000
Work in process (includes overhead applied of $37,520) $139,300
Finished goods (includes overhead applied of $101,840) $378,100
Cost of goods sold (includes overhead applied of $396,640) $1,472,600
Required:
1. Compute the underapplied or overapplied overhead.
2. Assume that the company closes any underapplied oroverapplied overhead to Cost of Goods Sold. Prepare the appropriatejournal entry.
3. Assume that the company allocates any underapplied oroverapplied overhead proportionally to Work in Process, FinishedGoods, and Cost of Goods Sold. Prepare the appropriate journalentry.
4. How much higher or lower will net operating income be if theunderapplied or overapplied overhead is allocated to Work inProcess, Finished Goods, and Cost of Goods Sold rather than beingclosed to Cost of Goods Sold?
