Question

Osborn Manufacturing uses a predetermined overhead rate of \$19.20 per direct labor-hour. This predetermined rate was based on a cost formula that estimates \$249,600 of total manufacturing overhead for an estimated activity level of 13,000 direct labor-hours. The company actually incurred \$247,000 of manufacturing overhead and 12,500 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?

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Answer #1
 1) Overhead Applied \$         2,40,000 (12500 hours*\$19.20 per hour) Less: Actual Overhead \$         2,47,000 UnderApplied \$               7,000 2) Journal Entry Debit Credit Cost Of Goods Sold \$               7,000 Manufacturing Overhead \$        7,000 The gross margin would decrease by \$7000
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