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 $880,000 of total manufacturing overhead foran estimated activity level of 88,000 machine-hours.
During the year, a large quantity of furniture on the marketresulted in cutting back production and a buildup of furniture inthe company’s warehouse. The company’s cost records revealed thefollowing actual cost and operating data for the year:
| | |
| Machine-hours | | 79,000 |
| Manufacturing overhead cost | $ | 836,000 |
| Inventories at year-end: | | |
| Raw materials | $ | 15,000 |
| Work in process (includes overhead applied of $71,100) | $ | 171,900 |
| Finished goods (includes overhead applied of $134,300) | $ | 324,700 |
| Cost of goods sold (includes overhead applied of $584,600) | $ | 1,413,400 |
|
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?
