Final answer:
The adjustment for overapplied overhead decreases cost of goods sold and increases net income, because it corrects for the instances when estimated overhead costs were higher than the actual costs incurred.
Step-by-step explanation:
The adjustment for overapplied overhead decreases cost of goods sold and increases net income. Overapplied overhead occurs when the overhead applied to products during a period is more than the actual overhead incurred. Companies that use job-order costing or process costing systems apply overhead to their products throughout the year based on an estimated rate.
If overhead is overapplied, then the estimated overhead costs exceed the actual overhead costs. This discrepancy leads to the cost of goods sold being too high, because too much overhead was allocated to products. Therefore, when adjusting for overapplied overhead, the cost of goods sold is decreased, resulting in an increase to net income.