Question

Osborn Manufacturing uses a predetermined overhead rate of $20.00 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $276,000 of total manufacturing overhead for an estimated activity level of 13,800 direct labor-hours. The company incurred actual total manufacturing overhead costs of $275,000 and 13,300 total direct labor-hours during the period.

1. Determine the amount of underapplied or overapplied manufacturing overhead for the period.
2. 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?

Answer 1

1. $9,000 under applied

2. Gross income decreases by $9,000

Step-by-step explanation:

1. To compute the amount of under applied or over applied manufacturing overhead, first we have to determine the applied overhead which is shown below:

Applied overhead = Predetermined overhead rate × total direct labor-hours

= $20 × 13,300 direct labor hours

= $266,000

So, the amount would be

= Actual total manufacturing overhead costs - applied overhead

= $275,000 - $266,000

= $9,000 under applied

2. Since the manufacturing overhead is under applied which decreases the company gross margin for $9,000