Question

Saved A 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. 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 close the underapplied or overapplied overhead increase or decrease the company's gross margin? By how much? (All answers are whole numbers -- unless specified otherwise. You should NOT include the $ sign or a comma. E.g., you should type 1000 for one thousand. Negative numbers should be added with a minus sign, e.g., -1000 for a decrease or loss of one thousand.) 1. Manufacturing overhead 2. The gross margin would by by

Answer 1

Applied OH (11900*18.6)	221,340
Actual OH	225,000
Underapplied OH	3,660

Manufacturing overhead underapplied by $3,660

2. The gross margin would decrease by $3,660

Because manufacturing overhead is underapplied, the cost of goods sold would increase by $3,660 and the gross margin would decrease by $3,660.