Question

Emco Company uses direct labor cost as a basis for computing its predetermined overhead rate. In computing the predetermined overhead rate for last year, the company included in direct labor cost a portion of indirect labor. The effect of this misclassification will be to Select one: a. have no effect on the predetermined overhead rate. b. understate the predetermined overhead rate. c. overstate the predetermined overhead rate d. This cannot be determined from the information given.

Answer 1

b. understate the predetermined overhead rate

Step-by-step explanation:

`(Cost\: Of \:Manufacturing \:Overhead)/(Cost \:Driver)= Overhead \:Rate`

The rate is determinate by distributing the expected cost over the cost driver

In this case labor cost.

as this value is higher than it should

(labor + some indirect)

`(Cost\: Of \:Manufacturing \:Overhead)/(direct \: labor+ indirect \: labor)= Overhead \:Rate`

the result of the division will be lower thus, the overhead rate is lower than it should be without the mistake.