Osborn Manufacturing uses a predetermined overhead rate of $19.80 per direct lab

Question

Osborn Manufacturing uses a predetermined overhead rate of $19.80 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $269,280 of total manufacturing overhead for an estimated activity level of 13,600 direct labor-hours.

     The company incurred actual total manufacturing overhead costs of $265,000 and 13,100 total direct labor-hours during the period.

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

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?

Osborn Manufacturing uses a predetermined overhead rate of $19.80 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $269,280 of total manufacturing overhead for an estimated activity level of 13,600 direct labor-hours.

     The company incurred actual total manufacturing overhead costs of $265,000 and 13,100 total direct labor-hours during the period.

Explanation / Answer

1. Manufacturing overhead underapplied = (Actual direct labor-hours × Predetermined overhead rate) - Manufacturing overhead incurred

= (13,100 × $19.80) - $265,000

= $259,380 - $265,000

= $5,620

2. The gross margin would decrease by $5,620

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