Direct Labor-Hours Results

skimming 5% off the estimated direct undertaking hours in the base for the predetermined smasher rate will wrongproduce ahigh overhead rate, which will result in over employ overhead. Thus, inflating the cost of goods sold until year give notice, and overstating the inventories. The over applied overhead will be recognized at year end by closing it to cost of goods sold. The adjustment for the over applied overhead will result in a giving boost in net operating income at year end.Understating direct labor-hours results in by artificial means inflating the overhead rate, which will apparent result in overapplied overhead for the year.Shaving 5% off the estimated direct labor-hours in the predetermined overhead rate will result in an unnaturally high overhead rate, which is likely to result in overapplied overhead for the year. The cumulative effect of overapplying the overhead end-to-end the year is all recognized in December when the balance in the Manufacturing Overhead a ccount is shut out to Cost of Goods Sold. If the balance were closed out every month or every quarter, this effect would be dissipated over the course of the year.First, the practice of understating direct labor-hours results in artificially inflating the overhead rate. This has the effect of inflating the cost of goods sold figures in all months former to December and overstating the costs of inventories. In December, the adjustment for overapplied overhead provides a big boost to net operating income. Therefore, the practice results in distortions in the normal of net operating income over the year. In addition, since all of the adjustment is taken to Cost of Goods Sold, inventories are still overstated at year-end. This means that retained earnings is also overstated.