Final answer:
A. increases cost of goods sold and decreases net operating income.
The adjustment for underapplied overhead increases cost of goods sold and decreases net operating income.
Step-by-step explanation:
The adjustment for underapplied overhead is used to correct for the situation where the actual overhead costs incurred are greater than the amount allocated to production.
When underapplied overhead occurs, it means that the company did not allocate enough overhead to its products, resulting in an understatement of cost of goods sold and an overstatement of net operating income.
In order to rectify this, the underapplied overhead amount is added to the cost of goods sold, which increases it, and subtracted from net operating income, which decreases it. Therefore, the correct answer is A. increases cost of goods sold and decreases net operating income.