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 actually incurred $275,000 of manufacturing overhead and 13,300 direct labor-hours during the period.

Required:

a. Determine the amount of underapplied or overapplied manufacturing overhead for the period.
b. 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 overhead increase or decrease the company's gross margin? By how much?

Answer 1

1. Manufacturing overhead applied = Actual hours * Predetermined overhead rate

Manufacturing overhead applied = 13300 * $20

Manufacturing overhead applied = $266,000

From the question, Osborn Manufacturing actually incurred $275,000 of manufacturing overhead. Hence, the Manufacturing overhead is under-applied because the applied manufacturing overhead is less than the actual manufacturing overhead

Hence, Manufacturing overhead under-applied = $275,000 - $266,000

= $9,000

2. Since the applied manufacturing overhead is less than the actual manufacturing overhead, the gross margin would decrease by $9,000. The journal entry will use the under-applied manufacturing overhead for record.