Reference no: EM132611483

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 data for 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:

Problem 1. Compute the under applied or over applied overhead.

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

Problem 3. Assume that the company allocates any under applied or over applied overhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. Prepare the appropriate journal entry.

Problem 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?