In the past year, Oak Crafters Cabinets had total revenue of $2,500,000, cost of goods sold of $1,000,000 (before adjustment for over or underapplied overhead), administrative expenses of $600,000, and selling expenses of $400,000. During the year, overhead was applied using a predetermined rate of 70 percent of direct labor cost. Actual direct labor was $700,000. Actual overhead was $450,000.The ending balances in the inventory accounts (prior to adjustment for over applied overhead) are:
Raw Materials Inventory........$32,000
Work in Process Inventory........$80,000
Finished Goods Inventory........$48,000
Required:
a. Calculate net income treating the amount of over applied overhead as immaterial and assigning it to Cost of Goods Sold.
b. Calculate net income treating the amount of over applied overhead as material and apportioning it to the appropriate inventory accounts and Cost of Goods Sold. Round to the nearest whole dollar.
c Discuss the impact of the alternative treatments.