Osborn Manufacturing uses a predetermined overhead rate of $18.20 per direct lab

Question

Osborn Manufacturing uses a predetermined overhead rate of $18.20 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $218,400 of total manufacturing overhead for an estimated activity level of 12,000 direct labor-hours. The company incurred actual total manufacturing overhead costs of $215,000 and 11,500 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? The gross margin would decrease by

Explanation / Answer

1) Overhead applied = 11,500 X 18.20 = 209,300

Actual Overhead = 215,000

Overhead underapplied by = 215,000 - 209,300 = $ 5,700

2) underapplied will increase the Cost of Goods sold so decreases the Gross margin %age.

The gross margin woud decreases by = $ 5,700

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