EXERCISE 3-17 (30 MINUTES)

1. Shaving 5% off the estimated direct labor-hours in the predetermined

overhead rate will result in an artificially high overhead rate. The artifi-

cially high predetermined overhead rate is likely to result in overapplied

overhead for the year. The cumulative effect of overapplying the over-

head throughout the year is all recognized in December when the bal-

ance in the Manufacturing Overhead account is closed out to Cost of

Goods Sold. If the balance were closed out every month or every quar-

ter, this effect would be dissipated over the course of the year.