Osborn Manufacturing uses a predetermined overhead rate of $18.70 per direct lab

Question

Osborn Manufacturing uses a predetermined overhead rate of $18.70 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $233,750 of total manufacturing overhead for an estimated activity level of 12,500 direct labor-hours.

The company actually incurred $229,000 of manufacturing overhead and 12,000 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?

Explanation / Answer

1) Determination of the amount of underapplied or overapplied manufacturing overhead for the period :

   Manufacturing overheads applied = direct labour hours *overhead rate

                                                                = 12,000*18.70

                                                                = $224,400

       Manufacturing overheads applied = $224,500

        Manufacturing overhead incurred = $229,000

        Manufacturing overheads underapplied = ($229,000-$224,500) = $4,600

        Manufacturing overheads underapplied = $4,600

2) The gross margin would decrease by $4,600

               manufacturing overhead is under-applied,

               the cost of goods sold would increase by $4,600 and

                  the gross margin would decrease by $4,600

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