Cretin Enterprises uses a predetermined overhead rate of $21.90 per direct labor

Question

Cretin Enterprises uses a predetermined overhead rate of $21.90 per direct labor-hour. This predetermined rate was based on a cost formula that estimated $176,295 of total manufacturing overhead for an estimated activity level of 8,050 direct labor-hours.

          The company incurred actual total manufacturing overhead costs of $173,500 and 8,250 total direct labor-hours during the period.

Determine the amount of underapplied or overapplied manufacturing overhead for the period. (Input the amount as a positive value.)

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? (Input the amount as a positive value.)

Cretin Enterprises uses a predetermined overhead rate of $21.90 per direct labor-hour. This predetermined rate was based on a cost formula that estimated $176,295 of total manufacturing overhead for an estimated activity level of 8,050 direct labor-hours.

          The company incurred actual total manufacturing overhead costs of $173,500 and 8,250 total direct labor-hours during the period.

Explanation / Answer

(1)

Applied overhead = $21.90 x 8,250 hours (Actual hours) = $180,675

Actual overhead = $173,500

Since Applied overhead > Actual overhead,

Overhead is overapplied, equal to $(180,675 - 173,500) = $7,715

(2)

The overapplied overhead is entirely closed out to Cost of Goods Sold (COGS), therefore COGS is credited with $7,715.

This signifies that COGS decreases by $7,715. As COGS decreases, Gross profit (= Revenue - COGS) increases by $7,715.

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