1. How was the overhead rate of 185% of production run labor cost determined (formula only; no need of calculation)? What is the actual overhead rate for the current month? Is this difference the reason why gross margin of pumps fell from budgeted 35% to 5%?
POHR = (Total Manufacturing Overhead)/(Total Direct Labor Cost)
POHR = 654,600/351,000[GG1]
Applied OH = 1.85 x 351,000 = $649,350
Actual OH = $654,600
Overapplied by $5250. No, the difference of $5250 should not decrease the gross margins of the pumps.