Question

Osborn Manufacturing uses a predetermined overhead rate of $18.30 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $221,430 of total manufacturing overhead for an estimated activity level of 12,100 direct labor-hours.

The company incurred actual total manufacturing overhead costs of $217,000 and 11,600 total direct labor-hours during the period.

   

Required:
1.	Determine the amount of underapplied or overapplied manufacturing overhead for the period.

          

2.	Assuming that the entire amount of the underapplied or overapplied overhead is closed out to cost of goods sold, what would be the effect of the underapplied or overapplied overhead on the company's gross margin for the period?

       

Answer 1

Working
A	Actual Direct labors	11600
B	Predetermined Overhead rate	$              18.30
C=A x B	Overheads applied	$    212,280.00
D	Actual Overheads	$    217,000.00
E=D-C	Underapplied Overheads	$        4,720.00

When actual overheads are less than applied overheads then we say that overheads are overapplied and when actual overheads are more than applied overheads then it is called underapplied overheads.

In the above situation actual overheads are more than applied overheads hence the overheads are underapplied.

Requirement 1

Underapplied overheads=$4720

Requirement 2

Companies gross profit margin will decrease by $ 4,720

The cost of goods sold will increase if underapplied overheads are applied to COGS and since cost increase profit will decrease.