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.
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