Question

Osborn Manufacturing uses a predetermined overhead rate of $18.30 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $221,430 of total manufacturing overhead for an estimated activity level of 12,100 direct labor-hours. The company actually incurred $217,000 of manufacturing overhead and 11,600 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?

Answer 1

Answer:

Part 1. Determine the amount of underapplied or overapplied manufacturing overhead for the period

We have an overapplied situation of $ 4430 that is ($ 221430- $ 217000)

Part 2. Would the journal entry to dispose of the underapplied or overapplied overhead increase or decrease the company’s gross margin?

Cost of Goods Sold $ 4430 (debit)

Manufacturing Overhead $4430 (credit)

Therefore increase the company’s gross margin

Explanation:

Part 1. Determine the amount of underapplied or overapplied manufacturing overhead for the period

Under Applied situation is when Applied Overheads < Actual Overheads

Over Applied Situationis when Applied Overheads > Actual Overheads

Applied overhead are $ 221430

Actual Overheads are $ 217000

Therefore we have an overapplied situation of $ 4430 that is ($ 221430- $ 217000)

Part 2. Would the journal entry to dispose of the underapplied or overapplied overhead increase or decrease the company’s gross margin?

In Under Applied situation, the Cost of Goods Sold is increased by the amount underapplied, resulting in decrease in company’s gross margin

In Over Applied Situationis, the Cost of Goods Sold is decreased by the amount overapplied, resulting in increase in company’s gross margin

In our Case the Jouranal entry for this is

Cost of Goods Sold $ 4430 (debit)

Manufacturing Overhead $4430 (credit)