Question

Osborn Manufacturing uses a predetermined overhead rate of $19.70 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $265,950 of total manufacturing overhead for an estimated activity level of 13,500 direct labor-hours. The company incurred actual total manufacturing overhead costs of $260,000 and 13,000 total direct labor-hours during the period. Required: 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)- The amount of underapplied

Manufacturing overhead incurred = $260,000

Manufacturing overhead applied = The Direct labor hours x Predetermine overhead rate

= 13,000 Direct Labor Hours x $19.70 per direct labor hours

= $256,100

Therefore, The Manufacturing overhead underapplied = $3,900 [$260,000 – 256,100]

“The Manufacturing overhead underapplied = $3,900”

(2)- The effect of the underapplied overhead on the company's gross margin for the period

“The gross margin will decrease by $3,900”

If the Manufacturing overhead underapplied by $3,900, then the cost of goods sold will increase by $3,900 which will result in the Decrease of Company’s Gross Margin by $3,900