Reference no: EM133010584

Question - 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 $680,000 of total manufacturing overhead for an estimated activity level of 85,000 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) $115,000

Finished goods (Includes overhead applied of 91,200) 289,500

Costs of goods sold (includes overhead applied of 480,320) 1,524,700

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?