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.

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

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

Compute the underapplied or overapplied overhead.

Underapplied overhead cost

$165,000

2. Assume that the company closes any underapplied or overapplied overhead to Cost of Goods Sold. Prepare the appropriate journal entry.

No	Event	General Journal	Debit	Credit
1	1	Cost of goods sold	165,000
		Manufacturing overhead		165,000

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.

No	Event	General Journal	Debit	Credit
1	1	Work in process	16,500
		Finished goods	?
		Cost of goods sold	?
		Manufacturing overhead		165,000

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?

Fill in the blank:

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