Question

Terri computed the pre-determined overhead rate. She estimated that 440,000 direct labor hours were going to be used for the upcoming year. Her boss wanted her to change the estimate to 420,000 direct labor hours even though he knows that this amount is probably going to be wrong. 1) What is the effect of changing the estimated direct labor hours on the pre-determined overhead rate computation

Answer 1

Missing word "2. Should Terri change the estimated direct labor hours to 420,000? Why or why not?"

1) If estimated direct labor hours are fixed at 420,000 hours, then at the time of evaluating actual performance with standard performance, Direct labor efficiency variance will be definitely unfavourable which doesn't not accurately describes the actual efficiency of workforce.

2) Terri should not change the estimated direct hours at 420,000. Because, otherwise direct labor efficiency variance will be definitely unfavourable and workers will not get adequate bonus for their job. It will be profitable for the company or employer but typically unethical in deed. Workers will financially neglected and exploited by this act.