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Under / over applied overhead

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Cretin Enterprises uses a predetermined overhead rate of $21.40 per direct labor-hour. This predetermined rate was based on 8,000 estimated direct labor-hours and $171,200 of estimated total manufacturing overhead.
The company incurred actual total manufacturing overhead costs of $172,500 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 Preview

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

The amount of overhead applied = Predetermined overhead rate X actual direct labor hours
Overhead applied = 21.40 X 8,250 = 176,550
Actual ...

Solution Summary

The solution explains how to calculate the amount of under or over applied overhead and its impact on gross margin

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