Question

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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 - H

Answer 1

1)	Manufacturing OH		underapplied	by	$ 3,660.00
2)	Gross margin would		decrease	by	$ 3,660.00

Workings:

Predetermined OH rate =			$           18.60
Actual Direct Labor Hours =			11900
OH applied =			$ 221,340.00	($ 18.6 x 11900)
Actual OH incurred =			$ 225,000.00
Underapplied OH =			$     3,660.00

	Schedule of Cost of Goods Manufactured
	Direct materials:
	Beginning R.M inventory			$      8,400.00
Add:	Purchase of R.M			$ 132,000.00
	Total R.M available			$ 140,400.00
Less:	Ending R.M inventory			$    11,000.00
	R.M used in production				$ 129,400.00
	Direct labor				$    85,000.00
	Manufacturing OH				$ 204,000.00
	Total manufacturing costs				$ 418,400.00
Add:	Beginning WIP Inventory				$      5,000.00
					$ 423,400.00
Less:	Ending WIP inventory				$    20,900.00
	Cost of goods manufactured				$ 402,500.00

	Schedule of Cost of Goods Sold
	Beginning F.G inventory				$    75,000.00
Add:	Cost of Goods Manufactured				$ 402,500.00
	Cost of goods available for sale				$ 477,500.00
Less:	Ending F.G inventory				$    25,600.00
	Unadjusted cost of goods sold				$ 451,900.00
Add:	Underapplied OH				$    18,000.00
	Adjusted cost of goods sold				$ 469,900.00

Income Statement
Sales				$    655,000.00
Cost of Goods Sold				$    469,900.00
Gross Margin				$    185,100.00
Selling and Adm. Exp:
Selling Exp			$    102,000.00
Adm. Expense			$      41,000.00	$    143,000.00
Net Operating Income				$      42,100.00

Workings:

Actual OH cost		$ 222,000.00
Applied OH cost		$ 204,000.00
Underapplied OH		$    18,000.00

Is this okay?