Question

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Osborn Manufacturing uses a predetermined overhead rate of $18.90 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $240,030 of total manufacturing overhead for an estimated activity level of 12,700 direct labor-hours. The company incurred actual total manufacturing overhead costs of $237,000 and 12,200 total direct labor-hours during the period. Required: 1. Determine the amount of underapplied or overapplied manufacturing overhead for the period, Manufacturing overhead by 2. Assuming that the entire amount of the underapplied or overapplied overhead is closed out to cost of goods sold, what would be the effect of the underapplied or overapplied overhead on the company's gross margin for the period? The gross margin would

Answer 1

a. Actual Hours: 12200 (given)

Pre-determined Rate : 18.90 per hour (given)

So, Applied Manufactured overhead (A) = 12200*18.9 = 230580

Actual Overhead (B) => 237000 (given)

Hence Under-applied Overhead = 237000-230580 => 6420.

b. Since the under-application is adjusted to COGS, the value of COGS would go up by 6420.

Hence, Gross Margin would Decrease by $ 6420.

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