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 following estimates were used in preparing the predetermined overhead rate at the beginning of the year:
Machine-hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Fixed manufacturing overhead cost . . . . . . . . . . . . . . . . . $ 795,000
Variable manufacturing overhead per computer-hour . . . $ 1.40
During the year, a glut 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 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 company's predetermined overhead rate.
2. Compute the underapplied or overapplied overhead.
3. Assume that the company closes any underapplied or overapplied overhead directly to Cost of Goods Sold. Prepare the appropriate journal entry.
4. Assume that the company allocates any underapplied or overapplied overhead to Work in Process, Finished Goods, and Cost of Goods Sold on the basis of the amount of overhead applied that remains in each account at the end of the year. Prepare the journal entry to show the allocation for the year.
5. How much higher or lower will net operating income be if the underapplied or overapplied overhead is allocated rather than closed directly to Cost of Goods Sold?