Reference no: EM13581787

Savallas Company is highly automated and uses computers to control manufacturing operations. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of computer-hours.The following estimates were used in preparing the predetermined overhead rate at the beginning of the year:

Computer-hours		85,000
Fixed manufacturing overhead cost	$	1,275,000
Variable manufacturing overhead per computer-hour	$	3.00

During the year, a severe economic recession resulted in cutting back production and a buildup of inventory in the company%u2019s warehouse. The company%u2019s cost records revealed the following actual cost and operating data for the year:

Computer-hours		60,000
Manufacturing overhead cost	$	1,350,000
Inventories at year-end:
Raw materials	$	400,000
Work in process	$	160,000
Finished goods	$	1,040,000
Cost of goods sold	$	2,800,000

1. Compute the underapplied or overapplied overhead for the year.

2. Assume the company closes any underapplied or overapplied overhead directly to cost of goods sold.Prepare the appropriate entry.

3. How much higher or lower will net operating income be for the year if the underapplied or overapplied overhead is allocated rather than closed directly to cost of goods sold?