Direct Labor-Hours Results

Shaving 5% off the estimated need labor hours in the footing for the predetermined command overhead rate will falselyproduce ahigh overhead rate, which will result in over applied overhead. Thus, inflating the follow of goods sold until year end, and overstating the inventories. The over applied overhead will be recognized at year end by closing it to cost of goods sold. The enrolment for the over applied overhead will result in a big boost in net direct income at year end.Understating direct labor-hours results in artificially inflating the overhead rate, which will likely result in overapplied overhead for the year.Shaving 5% off the estimated direct labor-hours in the predetermined overhead rate will result in an artificially high overhead rate, which is likely to result in overapplied overhead for the year. The cumulative heart of overapplying the overhead end-to-end the year is all recognized in December when the balance in the Manufacturing Overhead account is closed r eveal 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 prior 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 pattern of net operating income over the year. In addition, since all of the adjustment is taken to Cost of Goods Sold, inventories are still magnified at year-end. This means that retained earnings is also overstated.