Swish Company is highly automated and uses computers to control manufacturing operations. The company has a job-order costing system in use and applies manufacturing overhead cost products on the basis of computer hours of activity. 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 build up 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 Progress $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 under or over applied overhead for the year.
3. Assume the company closes any under or over applied overhead directly to Cost of Goods Sold. Prepare the appropriate journal entry.
4. Assume the company allocates any under or over applied overhead to Work in Progress, 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 income be for the year if the under or over applied overhead is allocated rather than closed directly to Cost of Goods Sold?