Question

Osborn Manufacturing uses a predetermined overhead rate of $18.50 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $227,550 of total manufacturing overhead for an estimated activity level of 12,300 direct labor-hours. The company actually incurred $221,000 of manufacturing overhead and 11,800 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 by by

Answer 1

1. Calculation of Amount of Underapplied or Overapplied Manufacturing Overhead for the period :-

Predetermined Overhead Rate = Total Manufacturing Overhead / Cost Driver

Predetermined Overhead Rate = $ 227550 / 12300 Labor hours = $ 18.5 per direct labor-hour

Actual Direct Labor Hours = 11800

Overhead Applied = Predetermined Overhead Rate * Actual Direct Labor Hours

Overhead Applied = $ 18.5 per direct labor-hour * 11800 Labor- hour = $ 218300

Actual Manufacturing Overheads = $ 221000

Actual Manufacturing Overheads	$ 221000
Overhead Applied	$ 218300
Under Applied Overheads	$ 2700

2. Since underapplied Overheads is closed to Cost of Goods Sold , Underapplied Overheads will increase Cost of Goods sold by $ 2700 and hence it will decrease Company's Gross margin by $ 2700.

The Journal Entry would be :

Cost of Goods Sold A/c Dr.	$ 2700
To Manufacturing Overheads		$ 2700

1.	Manufacturing Overhead	Under Applied	by	$ 2700
2.	The Gross Margin would	Decrease	by	$ 2700