Problem 2-21B Predetermined Overhead Rate; Disposition of Underapplied or Overapplied Overhead [LO2-1, LO2-7]

Adriana 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		88,000
Fixed manufacturing overhead cost	$	1,372,800
Variable manufacturing overhead per computer-hour	$	3.20

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

Computer-hours		65,000
Manufacturing overhead cost	$	1,320,000
Inventories at year-end:
Raw materials	$	465,000
Work in process	$	210,000
Finished goods	$	1,075,000
Cost of goods sold	$	2,815,000

Required:

1.	Compute the companys predetermined overhead rate for the year. (Round your answer to two decimal places.)

2.	Compute the underapplied or overapplied overhead for the year. (Round your final answer to the nearest dollar amount.)

3.1

Assume the company closes any underapplied or overapplied overhead directly to Cost of Goods Sold. Prepare the appropriate journal entry. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Record the appropriate journal entry to close any underapplied or overapplied overhead directly to Cost of Goods Sold.

3.2 Will this entry increase or decrease net operating income?