Question

Osborn 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. Required: 1. Determine the amount of underapplied or overapplied manufacturing overhead for the period. 2 Assume thet 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? Manufacturing overhead 2. The gross margin would by by

Answer 1

Requirement-1: $230,640 12,400 Estimated total manufacturing overhead costs Estimated total direct labor-hours Predetermined overhead rate per direct labor-hour$18.60 Actual direct labor-hours worked Manufacturing overhead costs applied Actual manufacturing overhead costs incurred$225,000 Under-applied manufacturing overhead costs (Because applied is less than the actual overhead costs) [$230,640/12,400 hours] 11,900 $221,340 [11,900 hours x $18.60] $3,660 [Difference between $225,000 and $221,340] Requirement-2: Gross profit margin would decrease by $3,660. (Because journal entry will increase the cost of goods sold when under-applied overhead costs are closed to cost of goods sold)