Question

Cretin Enterprises uses a predetermined overhead rate of $7 .50 per direct labour hour. This predetermined rate was based on 16,000 estimated direct labour-hours and $120,000 of estimated total manufacturing overhead. The company incurred actual total manufacturing overhead costs of $114,750 and 15,500 total direct labour-hours during the period. There were no beginning inventories, and all goods produced in the period were shipped out to customers before period end. 

 

Required:

1. Determine the amount of under applied or over applied manufacturing overhead for the period.

2. What is the effect on gross margin for the period?

Answer 1

1.

 

Actual direct labour-hours..................................................15,500

× Predetermined overhead rate.........................................$7.50

Manufacturing overhead applied...............................$116,250

Less: Manufacturing overhead incurred.....................114,750

Manufacturing overhead over applied.........................$ 1,500

 

2.

Because manufacturing overhead is over-applied and there were no beginning or ending inventories, the cost of goods sold would decrease by $1,500 and the gross margin would increase by $1,500.

1. Manufacturing overhead over applied = $ 1,500

 

2. The gross margin would increase by $1,500.