Question

Osborn Manufacturing uses a predetermined overhead rate of $19.60 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $262,640 of total manufacturing overhead for an estimated activity level of 13,400 direct labor-hours. The company actually incurred $255,000 of manufacturing overhead and 12,900 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? by 1. Manufacturing overhead 2. The gross margin would

Answer 1

Applied overhead = $19.60 X 12,900 = $252,840

Actual overhead is more than applied overhead. Overhead is Underapplied.

Underapplied overhead = $255,000 - $252,840 = $2,160

Underapplies overhead will increase cost of goods sold. Increase in cost of goods sold will decrease gross margin.

1.	Manufacturing overhead	Underapplied	by	$2,160
2.	The gross margin would	Decrease	by	$2,160