Question

Osborn Manufacturing uses a predetermined overhead rate of $20.20 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $282,800 of total manufacturing overhead for an estimated activity level of 14,000 direct labor-hours.

The company actually incurred $279,000 of manufacturing overhead and 13,500 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 to Part 1.

Manufacturing Overhead applied = Actual Direct Labor Hours * Predetermined Overhead Rate
Manufacturing Overhead applied = 13,500 * $20.20
Manufacturing Overhead applied = $272,700

Since, the Manufacturing Overhead applied i.e. $272,700 is less than the Manufacturing Overhead incurred i.e. $279,000, the Overhead is Underapplied.

Manufacturing Overhead Underapplied = $272,700 - $279,000
Manufacturing Overhead Underapplied = -$6,300

Answer to Part 2.

As, the Manufacturing Overhead is Underapplied, the Cost of Goods sold will increase and the Gross Margin will decrease by $6,300.

The Journal Entry to dispose will be:

Cost of Goods Sold                  6,300
                 Gross Margin                                          6,300