Question

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Osborn Manufacturing uses a predetermined overhead rate of $20.20 per direct labor-hour. This as based on a cost formula that estimates $282,800 of total manufacturing overhead for an estimated activity level of 14,000 direct labor-hours. The company incurred actual total manufacturing overhead costs of $279,000 and 13,500 total direct labor-hours during the period. Required: 1. Determine the amount of underapplied or overapplied manufacturing overhead for the period. Manufacturing overhead by 2. Assuming that the entire amount of the underapplied or overapplied overhead is closed out to cost of goods sold, what would be the effect of the underapplied or overapplied overhead on the company's gross margin for the period? The gross margin would

Answer 1

1. Manufacturing overhead applied = Actual direct labor-hours × Predetermined overhead rate = 13,500 × $20.20 = $272,700

Manufacturing overhead underapplied = Manufacturing overhead incurred - Manufacturing overhead applied = $279,000 - $272,700 = $6,300

Manufacturing overhead underapplied by $6,300.

2. The gross margin would decrease by $6,300.

Because manufacturing overhead is underapplied, the journal entry would increase cost of goods sold by $6,300 and the gross margin would decrease by $6,300.