Luzadis Company makes furniture using the latest automated technology. The company uses a job order costing...

Estimated total manufacturing overhead $900,000 Estimated total machine-hours 75,000 Predetermined overhead rate per machine hour $12 ($900000 / 75000 machine hours] Actual machine hours worked 60,000 Manufacturing overhead cost applied to production $720,000 (60000 machine hours x $12] Actual Manufacturing ovehead cost incurred $850,000 Under-applied manufacturing overhead cost $130,000 [Difference between $850000 & $720000] (It is under-applied because applied mfg. overhead is less than actual mfg. overhead incurred) 2) Journal entry to close under-applied overhead to cost of goods sold: Account titles Cost of goods sold Manufacturing overhead Debit $130,000 Credit (Cost of goods sold is debited as current cost of goods sold would be reported short due to under-applied mfg. OH] $130,000 [Mfg. overhead is credited as current mfg.

Overhead applied would show debit balance due to under-applied mfg. OH] 3) Value of ending work in process without overhead applied Value of ending finished goods without overhead applied Value of cost of goods sold without overhead applied Total cost of ending inventory reported $64,000 ($100,000 - $36,000] $320,000 ($500,000 - $180,000] $896,000 ($1,400,000 - $504,000] $1,280,000

Journal entry to close under-applied overhead to work-in-process, finished goods and cost of goods sold proportionately: Account titles Work in process Finished goods Cost of goods sold Manufacturing overhead Debit $6,500 $32,500 $91,000 Credit ($130000 x ($64000 / $1280000)] ($130000 x ($320000 / $1280000)] ($130000 x ($896000 / $1280000)] $130,000 When under-applied mfg. overhead cost is allocated among work in process, finished goods and cost of goods sold, firm's income statement will report mfg. overhead allocated to cost of goods sold only as cost for the respective reporting period. In simple words, firm's total cost for the reporting period will not include under-applied mfg.

Overhead allocated to work in process and finished goods. As a result, firm's net operating income will be higher by the amount that equals to sum of amount of mfg. overhead allocated to WIP & FG. Mfg. overhead cost allocated to work in process Mfg.

Overhead cost allocated to finished goods Net operating income will be reported higher by $6,500 [Ref: Part-3] $32,500 (Ref: Part-3] $39,000 if underapplied overhead is allocated to WIP, FG, & Cost of Goods Sold rather than being closed to cost of goods Cost sold fully.