Question

In computing its predetermined overhead rate, Nelson Inc. added the direct labor into the estimated overhead. This error will result in:

a. The ending balance of Finished Goods inventory to be understated
b. The cost of goods sold to be understated
c. The cost of goods sold to be overstated
d. Net operating income to be understated

Answer 1

c. The cost of goods sold to be overstated and

d. Net operating income to be understated

Step-by-step explanation:

Overheads are applied based on indirect costs estimated, and that the cost do not include any direct cost.

If direct cost is also added then it will be twice applying such cost, this will clearly reflect that the overhead rate is over applied, and thus this will result in cost of goods sold overstated.

This is due to high rate charged, accordingly as cost will be more than the actual cost, net operating income will also be understated as cost is more and revenue is less.

Thus, statement C and statement D is correct.