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 $1,066,000 of total manufacturing overhead for an estimated activity level of 82,000 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 68,000
Manufacturing overhead cost $ 1,029,000
Inventories at year-end:
Raw materials $ 17,000
Work in process (includes overhead applied of $88,400) $ 192,000
Finished goods (includes overhead applied of $132,600) $ 288,000
Cost of goods sold (includes overhead applied of $663,000) $ 1,440,000
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?

Compute the underapplied or overapplied overhead.

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.)

Journal entry worksheet

Transaction Index :

Record the entry to close the balance in the manufacturing overhead account to the cost of goods sold account.

Note: Enter debits before credits.

Event General Journal Debit Credit
1
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.)

Journal entry worksheet

Transaction Index :

Record the allocation of the underapplied/overapplied overhead to various accounts.

Note: Enter debits before credits.

Event General Journal Debit Credit
1
+

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?

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?
Net operating income will be if the
overhead is allocated rather than closed entirely to cost of goods sold.
+

Answer 1

Answer:

Part (1) Calculate the under applied or over applied overhead.

Manufacturing overhead incurred is $1,029,000. Applied overhead is $884,000.

Under applied overhead = Manufacturing overhead incurred — Applied overhead

Under applied overhead = $1,029,000 - $884,000

Under applied overhead = $145,000

Note:

Applied overhead= (Applied overhead in WIP) + (Applied overhead in Finished goods) + (Applied overhead in cost good sold)  

Applied overhead = $88,400 + 0132,600 + 6663,000

Applied overhead = $884,000

Part (2) Record the journal entry for under or over applied overhead to cost of goods sold.

(To record the under applied overhead transferred to cost of goods sold)

Debit: Cost of goods sold =  $145,000  

Credit: Manufacturing overhead = $145,000

Part (3) Record the journal entry for proportional allocation of under or over applied overhead to WIP, finished goods and cost of goods sold.

Debit: Work-in-process ($145000 × $88400 ÷ $884,000) = $14500  

Debit: Finished goods ($145000 × $132600 ÷ $884000) = $21750  

Debit: Cost of goods sold ($145000 × $663,000 ÷ $884,000) = $108750  

Credit: Manufacturing overhead = $145000

(To record under or over applied overhead transferred to WIP. finished goods and cost of goods sold)    

Part (4)

The net operating profit will be increased to the extent of $36250 (14500 + 21750) if the under applied overhead is allocated to work-in-process, finished goods and cost of goods sold rather than being closed to cost of goods sold.