Question

Osborn Manufacturing uses a predetermined overhead rate of $18.80 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $236,880 of total manufacturing overhead for an estimated activity level of 12,600 direct labor-hours. The company actually incurred $233,000 of manufacturing overhead and 12,100 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

Answer 1

Required 1 :
Manufacturing overhead applied = Predetermined overhead rate * Actual direct labor hours worked = 18.80 * 12100	227480
Actual manufacturing overhead incurred	233000
As the manufacturing overhead applied are less than the actual manufacturing overhead incurred, the manufacturing overhead is underapplied by 5520 ( i.e. 233000 - 227480 )

Manufacturing overhead

Underapplied

by

5520

Required 2 :
Journal entry to dispose of the underapplied overhead :
	Debit	Credit
Cost of goods sold	5520
Manufacturing overhead		5520

As from the journal entry we can see that while disposing the underapplied manufacturing overhead to cost of goods sold, the cost of goods sold is increasing and hence the gross margin will decrease by that amount

The gross margin would

Decrease

by

5520