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 actually incurred $215,000 of manufacturing overhead and 11,500 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? 

Answer 1

1.

Predetermined overhead rate = $18.20 per direct labor hour

Actual direct labor hour = 11,500

Overhead applied = Predetermined overhead rate x Actual direct labor hour

= 18.20 x 11,500

= $209,300

Actual overheads = $215,000

Under applied overheads = Actual overheads - Overhead applied

= 215,000 - 209,300

= $5,700

Manufacturing overheads = $5,700

2.

When under applied overhead is closed to cost of goods sold, it would increase cost of goods sold and thus company's gross margin will decrease by $5,700.

Gross margin would decrease by $5,700.

1	Manufacturing overhead	under applied	by	$5,700
2	The gross margin would	Decrease	by	$5,700

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