Problem 3-12 (Algo) Predetermined Overhead Rate; Disposing of Underapplied or Overapplied Overhead [LO3-4]

Luzadis Company makes furniture using the latest automated technology. The company uses a job-order costing system and applies manufacturing overhead costs to products on the basis of machine hours. The predetermined overhead rate was based on a cost formula that estimates $1,152,000 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 55,000 Manufacturing overhead cost $ 1,102,000 Inventories at year-end: Raw materials $ 18,000 Work in process (includes overhead applied of $52,800) $ 114,600 Finished goods (includes overhead applied of $167,200) $ 362,900 Cost of goods sold (includes overhead applied of $660,000) $ 1,432,500

Required: 1. 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 Sold?