Problem 3-12 (Static) 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 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 companys warehouse. The companys 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

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?

Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Compute the underapplied or overapplied overhead. Required 1 Required 2 Required 3 Required 4 Assume that the company closes any underapplied or overapplied overhead to Cost of Goods Sold. Prej (If no entry is required for a transaction/event, select "No journal entry required" in the first account fi View transaction list Journal entry worksheet 1 Record the entry to close the balance in the manufacturing overhead account to the cost of goods sold account. Note: Enter debits before credits. Transaction General Journal Debit Credit 1 Record entry Clear entry View general journal Required 1 Required 2 Required 3 Required 4 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet 1 > Record the allocation of the underapplied/overapplied overhead to various accounts. Note: Enter debits before credits. Transaction General Journal Debit Credit 1 Record entry Clear entry View general journal Required 1 Required 2 Required 3 Required 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? Net operating income will be if the overhead is allocated rather than closed entirely to cost of goods sold