Sharp Company's records show that overhead was overapplied by $10,000 last year. overapplied overhead was closed out to the Cost of Goods Sold account at the end of the year. In trying to determine why overhead was overapplied by such a large amount, the company has discovered that $6,000 of depreciation on factory equipment was charged to administrative expense in error. Given the above information, which of the following statements is true?
A)Under the circumstances posed above, the error in recording depreciation would have no effect on net income for the year.
B)Manufacturing overhead was actually overapplied by $16,000 for the year.
C)The amount of $6,000 in depreciation should have been charged to Work in Process rather than to administrative expense.
D)The company's net income is understated by $6,000 for the year.

Question

Quizplus · Accepted Answer

BThe error in recording depreciation does not affect net income because it is a reclassification within expenses. The actual overapplied overhead is $16,000 because the $6,000 error should have been included in manufacturing overhead, not administrative expenses.

Sharp Company's Records Show That Overhead Was Overapplied by $10,000