Osborn Manufacturing uses a predetermined overhead rate of $18.60 per direct lab

Question

Osborn Manufacturing uses a predetermined overhead rate of $18.60 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $230,640 of total manufacturing overhead for an estimated activity level of 12,400 direct labor-hours The company actually incurred $225,000 of manufacturing overhead and 11,900 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? 1. Manufacturing overhead 2. The gross margin would by by

Explanation / Answer

a

Manufacturing Overhead

UNDERAPPLIED

By

$3,660

b

The Gross Margin

DECREASE

by

$3,660

Requirement (a)

Manufacturing Overhead Applied

Manufacturing Overhead Applied = Actual Direct Labor Hours x Predetermined Overhead rate

= 11,900 Direct Labor Hours x $18.60 per direct labor hours

= $ 221,340

Actual Manufacturing Overhead Incurred = $ 225,000

Manufacturing Overhead is under applied = $225,000 – 221,340 = $3,660

Therefore, The Manufacturing Overhead is UNDERAPPLIED by $3,660

Requirement (b)

THE GROSS MARGIN WOULD DECREASE BY $3,660

Since, the manufacturing overhead is underapplied by $3,660, the cost of goods sold would be increase by $3,660 and therefore, GROSS MARGIN would DECREASE by $3,660

a

Manufacturing Overhead

UNDERAPPLIED

By

$3,660

b

The Gross Margin

DECREASE

by

$3,660

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