Question

Osborn Manufacturing uses a predetermined overhead rate of $19.10 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $246,390 of total manufacturing overhead for an estimated activity level of 12,900 direct labor-hours. The company actually incurred $245,000 of manufacturing overhead and 12,400 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?

Answer 1

Answer and Explanation:

The computation is shown below:

a. The underapplied or overapplied overhead is

But before that the applied overhead is

Applied overhead = 12400 × 19.1

= $236,840

Now Underapplied overhead is

= $245,000 - $236,840

= $8,160

2 The gross margin of the company would be decreased by $8,160