Osborn Manufacturing uses a predetermined overhead rate of 1

Osborn Manufacturing uses a predetermined overhead rate of $18.60 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $230,640 of total manufacturing overhead for an estimated activity level of 12,400 direct labor-hours.

     The company incurred actual total manufacturing overhead costs of $225,000 and 11,900 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?

Solution

1)

Applied overhead:

= $18.60×11,900

= $221,340

Underapplied overhead:

= $225,000-$221,340

= $3,660

2)

Cost of goods will increase by the amount of underapplied overhead. So cost of goods sold will increase.

Hence, gross profit will decrease by $3,660.