Question

Cretin Enterprises uses a predetermined overhead rate of $21.40 per direct labor-hour. This predetermined rate was based on a cost formula that estimated $171,200 of total manufacturing overhead for an estimated activity level of 8,000 direct labor-hours. The company incurred actual total manufacturing overhead costs of $172,500 and 8,250 total direct labor-hours during the period.
a. Determine the amount of underapplied or overapplied manufacturing overhead for the period.
b. Assuming 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?

Answer 1

Answer:

See below

Explanation:

a. Given that the overhead application rate is $21.40 per direct labor hour and total labor hours used during the period are 8,250 hours

Overhead applied = $21.40 × 8,250

Overhead applied = $176,550

Actual overhead incurred = $172,500

Then, the manufacturing overhead is over applied for the period by $4,050

I.e

= Overhead applied - Actual overhead incurred

= $176,500 - $172,500

= $4,050

b. With regards to the above, if the over applied overhead is closed out to cost of goods sold, it means that the cost of goods sold amount would decrease . The reason is that since cost of goods sold is deducted from revenue to determine gross margin, a reduction in cost of goods sold would bring about an increase in the company's gross margin for the period by $4,050