XYZ Corporation applies manufacturing overhead on the basis of direct labor-hours. At the beginning of the most recent year, the company based its predetermined overhead rate on total estimated overhead of $15,500 and 2,500 estimated direct labor-hours. Actual manufacturing overhead for the year amounted to $21,000. The actual labor rate is $7.50 and the company paid a total of $21,750 for its actual direct labor usage.

The predetermined overhead rate for the year was

The applied manufacturing overhead for the year was closest to:

Was the overhead underapplied or overapplied? By how much?

Prepare journal entry to eliminate the underapplied or overapplied to Cost of Goods Sold account.

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Answer

1

Predetermined overhead rate

= Estimated total overhead / estimated Hour

Now out the figures in to the formula

= $ 15,500 /2500

= $ 6.2

Predetermined overhead rate = $ 6.2

2

The applied manufacturing overhead for the year

Manufacturing Overhead applied

= Predetermined overhead rate x Actual hours

Now out the figures in to the formula

= $ 6.2 x ( 21750/7.5)

=6.2 x 2900

= $ 17,980

3

Manufacturing overhead applied.......................$ 17980

Less: Manufacturing overhead incurred...............21000

Manufacturing overhead overapplied........................$3020

Manufacturing overhead overapplied----------$ 3020

Because manufacturing overhead is overapplied,

the cost of goods sold would decrease by $3020

the gross margin would increase by .......$ 3020