QUESTION 1

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 $651,000 of total manufacturing overhead for an estimated activity level of 93,000 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 company's warehouse. The company's cost records revealed the following actual cost and operating datafor the year:

Machine-hours 74,000

Manufacturing overhead cost $618,000

Inventories at year-end:

Raw materials $11,000

Work in process (includes overhead applied of $41,440) $146,400

Finished goods (includes overhead applied of $98,420) $347,700

Cost of goods sold (includes overhead applied of $378,140) $1,335,900

Required:

1. Compute the under applied or over applied overhead.

2. Assume that the company closes any under applied or over applied overhead to Cost of Goods Sold. Prepare the appropriate journal entry.

3. Assume that the company allocates any under applied or over appliedoverhead 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 under applied or over applied overhead is allocated to Work in Process, Finished Goods, and Cost of Goods Sold rather than being closed to Cost of Goods Sold?

QUESTION 3

Gold Nest Company of Guandong, China, is a family-owned enterprise that makes birdcages for the South China market. The company sells its birdcages through an extensive network of street vendors who receive commissions on their sales.

The company uses a job-order costing system in which overhead is applied to jobs on the basis of direct labor cost. Its predetermined overhead rate is based on a cost formula that estimated $103,500 of manufacturing overhead for an estimated activity level of$45,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials $10,100

Work in process $4,200

Finished goods $8,100

During the year, the following transactions were completed:

a. Raw materials purchased on account, $ 166,000.

b. Raw materials used in production, $143,000(materials costing $126,000were charged directly to jobs; the remaining materials were indirect).

c. Costs for employee services were incurred as follows:

Direct labor $178,000

Indirect labor $335,200

Sales commissions $23,000

Administrative salaries $44,000

a. Rent for the year was $18,600 ($13,000 of this amount related to factory operations, and the remainder related to selling and administrative activities).

b. Utility costs incurred in the factory, $13,000.

c. Advertising costs incurred, $11,000.

d. Depreciation recorded on equipment, $23,000. ($18,000 of this amount related to equipment used in factory operations; the remaining $5,000 related to equipment used in selling and administrative activities.)

e. Record the manufacturing overhead cost applied to jobs.

f. Goods that had cost $227,000 to manufacture according to their job cost sheets were completed.

g. Sales for the year (all paid in cash) totaled $500,000. The total cost to manufacture these goods according to their job cost sheets was $220,000.

Required:

1. Prepare journal entries to record the transactions for the year.

2. Prepare T-accounts for each inventory account, Manufacturing Overhead, and Cost of Goods Sold. Post relevant data from your journal entries to these T-accounts (don't forget to enter the beginning balances in your inventory accounts).

3A. Is Manufacturing Overhead under applied or over applied for the year?

3B. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

4. Prepare an income statement for the year. All of the information needed for the income statement is available in the journal entries and T-accounts you have prepared.