Question

Osborn Manufacturing uses a predetermined overhead rate of $19.10 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $246,390 of total manufacturing overhead for an estimated activity level of 12,900 direct labor-hours.

The company actually incurred $245,000 of manufacturing overhead and 12,400 direct labor-hours during the period.

Required:

1. Determine the amount of underapplied or overapplied manufacturing overhead for the period.

2. Assume that the company's underapplied or overapplied overhead is closed to Cost of Goods Sold. Would the journal entry to dispose of the underapplied or overapplied overhead increase or decrease the company’s gross margin? By how much?

Answer 1

Applied manufacturing overhead = Predetermined overhead rate X Actual direct labor hours

= $19.10 X 12,400

= $236,840

Actual manufacturing overhead = $245,000

Actual manufacturing overhead is more than Applied manufacturing overhead.

If actual overhead is more than applied overhead, then the overhead is underapplied.

A.

Underapplied overhead = Actual manufacturing overhead - Applied manufacturing overhead

= $245,000 - $236,840

= $8,160

B.

Underapplied overhead is debit to cost of goods sold. If cost of goods sold increases, expense increases. Increase in expense would decrease the gross margin by $8,160.