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 $1,368,000 of total manufacturing overhead for an estimated activity level of 72,000 machine-hours.

Machine-hours ......................................................................................61,000

Manufacturing overhead cost....................................................................$1,324,000

Inventories at year-end: Raw materials....................................................$16,000

Work in process (includes overhead applied of $115,900).........................$188,000

Finished goods (includes overhead applied of $208,620)........................$338,400

Cost of goods sold (includes overhead applied of $834,480).................$1,353,600

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 Sold?