Final answer:
Overapplied overhead can cause COGS to be overstated, WIP to be understated, and finished goods to be understated.
Step-by-step explanation:
Overapplied overhead refers to a situation where a company has allocated more overhead costs to its products than the actual amount incurred.
When overapplied overhead is applied to the Cost of Goods Sold (COGS) account, it will cause COGS to be overstated because the allocated overhead costs are higher than the actual costs, resulting in a higher cost of goods sold.
On the other hand, overapplied overhead in the Work in Progress (WIP) account will cause WIP to be understated because the allocated overhead costs are not properly accounted for in the WIP balance.
Finally, overapplied overhead for the Finished Goods account will cause finished goods to be understated since the allocated overhead costs are not properly accounted for, resulting in a lower finished goods balance.
correct answer: C. Overstate COGS, understate WIP, and understate finished goods.