Question

Emco Company uses direct labor cost as a basis for computing its predetermined overhead rate. In computing the predetermined overhead rate for last year, the company misclassified a portion of direct labor cost as indirect labor. The effect of this misclassification will be to:___________.A. understate the predetermined overhead rate.B. overstate the predetermined overhead rate.C. have no effect on the predetermined overhead rate.D. cannot be determined from the information given.

Answer 1

B. overstate the predetermined overhead rate.

Step-by-step explanation:

As we know

The Predetermined overhead rate would be equal to

Predetermined overhead rate = (Total estimated manufacturing overhead) ÷ (estimated direct labor-hours or machine hours)

In the given question, the direct labor cost is used for computing the predetermined overhead rate which is already wrong.

To find out the predetermined overhead rate, we always use the indirect cost instead of direct cost

This error could overstate the predetermined overhead rate as it would increase the indirect labor due to which overhead is also increased. So, automatically the rate would also be increased.