g 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.3. Assume that the company allocates any underapplied or overapplied overhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. Prepare the appropriate journal entry.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 So

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

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

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