Question

Osborn Manufacturing uses a predetermined overhead rate of $20.10 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $279,390 of total manufacturing overhead for an estimated activity level of 13,900 direct labor-hours. The company actually incurred $277,000 of manufacturing overhead and 13,400 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

Answer 1

Answer:

1. Amount of overapplied manufacturing overhead = $7,660

2. Company's gross margin will decrease by $7,660

Explanation:

Provided overhead predetermined rate = $20.10

Provided actual hours = 13,400

Therefore overhead cost based on predetermined rate = 13,400 X $20.10

= $269,340

Whereas actual incurred overheads = $277,000

Amount of overapplied manufacturing overhead = $277,000 - $269,340 = $7,660

Now since the cost is increased of goods sold, company's gross margin will decrease with the same amount = $7,660

1. Amount of overapplied manufacturing overhead = $7,660

2. Company's gross margin will decrease by $7,660