Question

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 actually incurred $215,000 of manufacturing overhead and 11,500 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?
Manufacturing overhead incurred (a)$215,000 Actual direct labor-hours 11,500× Predetermined overhead rate$18.20= Manufacturing overhead applied (b)$209,300 Manufacturing overhead underapplied (a) − (b)$5,700

Answer 1

To determine the underapplied or overapplied manufacturing overhead, subtract the manufacturing overhead applied from the actual manufacturing overhead incurred. If the underapplied or overapplied overhead is closed to Cost of Goods Sold, the company's gross margin will decrease by the amount of underapplied or increase by the amount of overapplied overhead.

Step-by-step explanation:

To determine the amount of underapplied or overapplied manufacturing overhead, we need to compare the actual manufacturing overhead incurred to the manufacturing overhead applied using the predetermined overhead rate. In this case:

Actual manufacturing overhead = $215,000

Manufacturing overhead applied = Predetermined overhead rate x Actual direct labor-hours = $18.20 x 11,500 = $209,300

Therefore, the underapplied manufacturing overhead is the difference between the actual manufacturing overhead incurred and the manufacturing overhead applied: $215,000 - $209,300 = $5,700. So, the amount of underapplied manufacturing overhead for the period is $5,700.

If the underapplied or overapplied overhead is closed to Cost of Goods Sold, the company's gross margin will decrease. This is because Cost of Goods Sold is an expense item that is deducted from the revenue to calculate the gross margin. In this case, since the manufacturing overhead is underapplied, it means that the actual manufacturing overhead incurred is more than the manufacturing overhead applied. This increases the expenses (Cost of Goods Sold) and decreases the gross margin by the amount of underapplied overhead, which is $5,700.