Complete Question:
1. 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 $900,000 of total manufacturing overhead for an estimated activity level of 75,000 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 60,000
Manufacturing overhead cost $ 850,000
Inventories at year-end:
Raw materials $ 30,000
Work in process
(includes overhead applied of $36,000) $100,000
Finished goods (includes overhead applied of $180,000) $500,000
Cost of goods sold (includes overhead applied of $504,000) 1,400,000
Answer:
Luzadis Company
a) Under-applied overhead:
= Applied overhead Minus Incurred overhead
= $720,000 - $850,000
= $130,000
b) Debit Cost of Goods Sold $130,000
Credit Manufacturing Overhead Applied $130,000
To record underapplied overhead.
c) Debit Work In Process Inventory $6,500
Debit Finished Goods Inventory $32,500
Debit Cost of Goods Sold $91,000
Credit Manufacturing Overhead Applied $130,000
d) The net operating income will be higher by $39,000 if the under-applied overhead is allocated to Work in Process, Finished Goods, and Cost of Goods Sold rather than being closed entirely to Cost of Goods Sold.
Explanation:
a) Data and Calculations:
Estimated overhead cost = $900,000
Estimated activity level = 75,000 MHs
Predetermined overhead rate = $900,000/75,000 = $12
Manufacturing overhead applied = $12 * 60,000 = $720,000
Actual manufacturing overhead incurred = $850,000
Applied Ratio Underapplied
Work in process (overhead applied) $36,000 5% $6,500
Finished goods (overhead applied) $180,000 25% 32,500
Cost of goods sold (overhead applied) $504,000 70% 91,000
Total overhead under-applied $130,000
