Osborn Manufacturing uses a predetermined overhead rate of $20.20 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $282,800 of total manufacturing overhead for an estimated activity level of 14,000 direct labor-hours. The company incurred actual total manufacturing overhead costs of $279,000 and 13,500 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 on the company's gross margin for the period?

Instructions are below.

Explanation:

Giving the following information:

Predetermined overhead rate= $20.20 per direct labor-hour.

The company incurred actual total manufacturing overhead costs of $279,000 and 13,500 total direct labor-hours during the period.

First, we need to calculate the allocated overhead:

Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base

Allocated MOH= 20.20*13,500= $272,700

Now, we can determine the over/under allocation:

Under/over applied overhead= real overhead - allocated overhead

Under/over applied overhead= 279,000 - 272,700

Under/over applied overhead= $6,300 underapplied

If overhead is underapplied, the company incurred in more overhead costs than estimated. Therefore, gross profit would decrease.