Answer:
Higher by 39,000 dollars
Explanation:
NOTE YOU POSTED THE QUESTION BUT NOT THE PROBLEM INTRODUCTION.
Ludacris Company makes furniture using the latest automated technology. The company uses a job-order costing system and applies to manufacture overhead cost to products on the basis of machine-hours. The predetermined overhead rate was based on a cost formula that estimates $900,000 of total manufacturing overhead for an estimated activity level of 75,000 machine- hours.
During the year, a large quantity of furniture on the market resulted in cutting back production and a buildup of furniture in the company's warehouse. The company's cost records revealed the following actual cost and operating data for the year:
Machine-hours 60,000
Manufacturing overhead cost $ 850,000
Inventories at year-end:
Raw materials $ 30,000
Work in process (includes overhead applied of $36,000) $100,000
Finished goods (includes overhead applied of $180,000) $500,000
Cost of goods sold (includes overhead applied of $504,000) 1,400,000
The company applied overhead for:
36,000 + 180,000 + 504,000 = 720,000
The actual overhead cost where 850,000
Thus, there was 130,000 dollar of underapplied overhead.
We do cross multiply to know the amount it should be allocate to cost COGS
504,000/720,000 x 130,000 = 91,000
This means we should increase COGS by 91,000 if we allcoate the underapplied overhead.
If we directly post into COGS then it will increase by 130,000
The difference of 39,000 dollars will mean a lower COGS thus, a higher operating income as a portion of the underapplied overhead is distribute among inventory and work in process.
