Cretin Enterprises uses a predetermined overhead rate of 213

Cretin Enterprises uses a predetermined overhead rate of $21.30 per direct labor-hour. This predetermined rate was based on a cost formula that estimated $170,613 of total manufacturing overhead for an estimated activity level of 8,010 direct labor-hours.

            The company incurred actual total manufacturing overhead costs of $168,500 and 8,250 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?

     

Solution

1) Actual manufacturing overhead 168,500 Applied overhead (21.30*8,250) 175725 overhead over applied 7,225 2) Gross margin will increase since overhead is over applied so the over applied overhead will decrease the cost of goods sold