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
Manufacturing overhead cost . . . . . . . . $1,530,000
During the year, a severe economic recession resulted in cutting back production and a buildup of inventory in the company’s warehouse. The company’s 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
Required:
1. Compute the company’s predetermined overhead rate for the year.
2. Compute the underapplied or overapplied overhead for the year.
3. Assume the company closes any underapplied or overapplied overhead directly to Cost of Goods Sold. Prepare the appropriate entry.
4. Assume that the company allocates any underapplied or overapplied overhead to Work in Process, Finished Goods, and Cost of Goods Sold on the basis of the amount of overhead applied during the year that remains in each account at the end of the year. These amounts are $43,200 for Work in Process, $280,800 for Finished Goods, and $756,000 for Cost of Goods Sold. Prepare the journal entry to show the allocation.
5. 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?