Question

Osborn Manufacturing uses a predetermined overhead rate of $19.40 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $256,080 of total manufacturing overhead for an estimated activity level of 13,200 direct labor-hours.

The company actually incurred $251,000 of manufacturing overhead and 12,700 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		by
2.	The gross margin would		by

Answer 1

Requirement 1

Overhead Underapplied by $4,620

Working

(A)	Budgeted Manufacturing Overheads	$ 256,080
(B)	Budgeted Direct labor hours	13,200
C= (A/B)	Predetermined Overhead rate	$            19.40
(D)	Actual Direct labor hours	12,700
E=(DxC)	Overheads Applied	$ 246,380
(F)	Actual Overheads	$ 251,000
G=(F-E)	Overheads Underapplied	-$ 4,620

Requirement 2

1	Manufacturing overhead	Increase	by	$4,620.00
2	The gross margin would	Decrease	by	$ 4,620.00