Question

Osborn Manufacturing uses a predetermined overhead rate of $18.50 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $227,550 of total manufacturing overhead for an estimated activity level of 12,300 direct labor-hours. The company actually incurred $221,000 of manufacturing overhead and 11,800 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:

(A) Underapplied             (2,300)

(B)

Cost of Goods Sold debit 2,300

Factory Overhead credit  2,300

It increase their COGS by 2,300 Their Gross Profit will decrease by the same amount

Explanation:

(A)

$\frac{Cost\: Of \:Manufacturing \:Overhead}{Cost \:Driver}= Overhead \:Rate$

227,550 / 12,300 = 18.5

APPLIED ACTUAL HOURS X RATE

11,800 \times 18.5 = 218,300

ACTUAL                 (221,000)

Underapplied             (2,300)

(B)

It increase their COGS by 2,300 Their Gross Profit will decrease by the same amount

Sales - COGS = Gross Profit

Sales - (COGS + 2,300 adjustment) = Gross Profit

Sales - Cogs - 2,300 = Gross Profit

The gross profit decreased 2,300

Answer 2

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

First, we have to calculate the overhead rate.

Overhead rate = Cost of manufacturing overhead / Cost driver

                         = $227, 550 / 12,300

                         = $18.5

Also,

Applied overhead = Actual hour * rate

                              = 11,800 * $18.5

                              =  $218,300

But Actual incurred = $221,000

Applied overhead - Actual overhead

                               = $218,300 - $221,000

Under applied        = $2,300

Therefore, the under applied over head for the period is $2,300

2.   Assume that the company's underapplied or overapplied overhead is closed to Cost of Goods Sold.

We know that;

Gross profit = Sales - Cost of goods sold

Gross profit = Sales - ( Cost of goods sold + 2,300)

Gross profit = Sales - Cost of goods sold - 2,300

Journal entry:

Dr Cost of Goods Sold 2,300

Cr Factory Overhead   2,300

It therefore means that their Cost of goods sold would increase by 2,300 whilst the Gross profit would also decrease by 2,300