Scanlon Company has a job-order costing system and applies manufacturing overhead cost to products on the basis of machine-hours. The following estimates were used in preparing the predetermined overhead rate for the most recent year: Machine-hours…………………………. 95,000 Manufacturing overhead cost …….. $1,710,000 During the most recent year, a severe recession in the companys industry caused a buildup of inventory in the companys warehouses. The companys cost records revealed the following actual cost and operating data for the year: Machine-hours………………………………………………………………….. 75,000 Manufacturing overhead cost ……………………………………………… $1,687,500 Amount of applied overhead in inventories at year-end: Work in process……………………………………………………………… $337,500 Finished goods……………………………………………………………….. $253,125 Amount of applied overhead in cost of goods sold……………… $759,375 Required: a. Compute the company’s predetermined overhead rate for the year and the amount of underapplied or overapplied overhead for the year. b. Determine the difference between net operating income for the year if the underapplied or overapplied overhead is allocated to the appropriate accounts rather than closed directly to Cost of Goods Sold.
