ABS Manufacturing uses a predetermined overhead rate of $18.20 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $218,400 of total manufacturing overhead for an estimated activity level of 12,000 direct labor-hours. The company incurred actual total manufacturing overhead costs of $215,000 and 11,500 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 onthe company’s gross margin for the period?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
EXERCISE 3–5 Underapplied and Overapplied
ABS Manufacturing uses a predetermined overhead rate of $18.20 per direct labor-hour. This predetermined rate
was based on a cost formula that estimates $218,400 of total manufacturing overhead for an estimated activity level
of 12,000 direct labor-hours. The company incurred actual total
11,500 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 onthe company’s gross margin for the period?
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