Osborn Manufacturing uses a predetermined overhead rate of $18.20 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $218,400 of total manufacturing overhead for an estimated activity level of 12,000 direct labor-hours.

Osborn Manufacturing uses a predetermined overhead rate of $18.20 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $218,400 of total manufacturing overhead for an estimated activity level of 12,000 direct labor-hours.

The company incurred actual total manufacturing overhead costs of $215,000 and 11,500 total direct labor-hours during the period.

Required:

  • Determine the amount of underapplied or overapplied manufacturing overhead for the period.

Under applied or (over) applied overhead = Overhead incurred – Overhead applied = Overhead incurred – (Hours worked x Predetermined overhead rate) = $215,000 – (11,500 hours x $18.20 per hour) = $215,500 – $209,300 = $5,700

  • 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?

Debit cost of goods sold $5,700 and credit Manufacturing overhead for $5,700.  Since cost of goods sold is deducted from sales revenue to find gross margin we can state that an increase in cost of goods sold would result in a decrease in gross margin.  Therefore, gross margin decreases by $5,700.

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