Question

Exercise 3-4 Underapplied and Overapplied Overhead (LO3-4] Osborn Manufacturing uses a predetermined overhead rate of $19.30 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $252,830 of total manufacturing overhead for an estimated activity level of 13,100 direct labor-hours. The company actually incurred $249,000 of manufacturing overhead and 12,600 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

Answer 1

Requirement 1 Overhead applied = $19.30 x 12,600DLH =$243,180 Underapplied or overapplied = Actual overhead - Overhead applied Underapplied or overapplied = $249,000 - $243,180 Overhead Underapplied = $5,820 Answer: Manufacturing overhead underapplied by $5,820 Requirement 2 To close out the under applied overhead, Cost of goods sold would be debited with $5,820. This would reduce the gross margin by $5,820. Answer: The gross margin would decrease by $5,820.