Question

EXERCISE 3-4 Underapplied and Overapplied Overhead LO3-4 Osborn Manufacturing uses a predetermined overhead rate of $18.20 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $218,400 of total manufacturing overhead for an estimated activity level of 12,000 direct labor-hours. The company actually incurred $215,000 of manufacturing overhead and 11.500 direct labo hours during the period. Required 1. Determine the amount of underapplied or overapplied manufacturing overhead for the period. 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? 2.

Answer 1

Ans.1	Under applied overhead =   Actual overhead - Applied overhead
		$215,000 - $209,300
		$5,700
	*Applied overhead = Predetermined overhead rate * Actual hours
		$18.20 * 11500
		$209,300
Ans.2	Journal entry to dispose of under applied overhead:
	No.	Particulars	Debit	Credit
		Cost of goods sold	$5,700
		Manufacturing overhead		$5,700
		(being under applied overhead transferred to cost of goods sold)
	The under applied overhead increases the cost of goods sold (by $5,700).
	Increase in cost of goods sold will decrease the gross margin by the same amount ($5,700).