. Decent Furnishing Company manufactures furniture using latest automated technology. The company applies a job order costing system and applies manufacturing overhead cost to products on the basis of machine hours. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year :

Machine hours. 75,000

Manufacturing overhead cost. Rs. 900,000

During the year, a glut of furniture on the market resulted in cutting back production and a build up of furniture in the companys warehouse. The companys cost records revealed the following actual cost and operating data for the year:

Machine hours. 60,000 Manufacturing overhead cost Rs. 850,000

Inventories at year-end:

Raw materials Rs. 30,000

Work in process (includes overhead applied of Rs. 36,000) Rs. 100,000

Finished goods (includes overhead applied of Rs. 180,000) Rs. 500,000

Cost of goods sold (includes overhead applied of Rs. 504,000) Rs.1,400,000

Required:

1) Compute the companys predetermined overhead rate.

2) Compute the under applied or over applied overhead.

3) Assume that the company closes any under applied or over applied overhead directly to the Cost of

Goods sold. What shall be the adjusted cost of goods sold ?

4) Assume the company allocates any under applied or over applied overhead to Work in process, Finished Goods, and the Cost of Goods Sold on the basis of the amount of overhead applied that remains in each account at the end of the year. How much higher or lower will net operating income be if the under applied or over applied overhead is allocated rather than closed directly to the Cost of Goods Sold ?