Osborn Manufacturing uses a predetermined overhead rate of $19.90 per direct lab

Question

Osborn Manufacturing uses a predetermined overhead rate of $19.90 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $272,630 of total manufacturing overhead for an estimated activity level of 13,700 direct labor-hours.

     The company incurred actual total manufacturing overhead costs of $270,000 and 13,200 total direct labor-hours during the period.

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

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?

Osborn Manufacturing uses a predetermined overhead rate of $19.90 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $272,630 of total manufacturing overhead for an estimated activity level of 13,700 direct labor-hours.

     The company incurred actual total manufacturing overhead costs of $270,000 and 13,200 total direct labor-hours during the period.

Explanation / Answer

1 Amount of underapplied/overapplied manufacturing overhead A Predetermined overhead rate per direct labor hour ($) 19.9 B Actual Total Direct Labor Hours 13200 C Amount of manufacturing Overhead recovered (A x B) $ 262680 D Actual Total Manufacturing overhead incurred ($) 270000 E Underapplied manufacturing overhead (D-C) $ 7320 Note Manufacturing overhead is underapplied because recovered amount is less than actually incurred 2 Effect of underapplied overhead on the company's gross margin If the entire amount of underapplied overhead is closed out to cost of goods sold then the gross margin for the period will be less by the amount of underapplied overhead. ($7320 in this case)

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