Luzadis Company makes furniture using the latest automated technology. The company uses a job-order costing system and applies m

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Luzadis Company makes furniture using the latest automated technology. The company uses a job-order costing system and applies m

anufacturing 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 company’s warehouse. The company’s cost records revealed the following actual cost and operating data for the year:

Machine-hours 76,000
Manufacturing overhead cost $637,000
Inventories at year-end:
Raw materials $20,000
Work in process (includes overhead applied of $36,480) $115,800
Finished goods (includes overhead applied of $91,200) $289,500
Cost of goods sold (includes overhead applied of $480,320) $1,524,700

Required:

a. Compute the underapplied or overapplied overhead.
b. Assume that the company closes any underapplied or overapplied overhead to 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.)
c. Assume that the company allocates any underapplied or over appliedoverhead 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.)
d. 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?

Business

1 answer:

arsen [2.9K] · Answer 1 · 2026-02-20T08:41:35+03:00

Response:

See the solution below

Clarification:

a. Calculate whether overhead is underapplied or overapplied

Initially, we must find the predetermined overhead rate.

Predetermined overhead rate = Expected total manufacturing overhead / Expected total machine hours

= $900,000 / 75,000 hours

= $12.0 hourly

However;

The actual manufacturing overhead stands at $637,000

The manufacturing overhead allocated to work in process this year = 76,000 actual MH × $12.00 per MH = $912,000

The amount of overapplied overhead cost equals $275,000

b. Journal entry

Cost of goods sold Dr $275,000

To Manufacturing overhead applied Cr $275,000

c. The excess overhead will be distributed based on the following ratios;

Work in process = $36,480. 6%

Finished goods = $91,200. 15%

Cost of goods sold = $480,320 79%

Total = $608,000 100%

The entry to capture the overhead allocation would include;

Work in process [6% × $275,000] = $16,500

Finished goods [15% × $275,000] = $41,250

Cost of goods sold [79% × $275,000] = $217,250

d. A comparison of both methods;

Cost of goods sold, if the overapplied overhead is closed to cost of goods sold [$1,524,700 + $275,000] results in $1,799,700

Cost of goods sold when the applied overhead is allocated to work in process, finished goods, and cost of goods sold = [$1,524,700 + $217,250] =

$1,741,950

The variance in cost of goods sold amounts to $57,750

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