In calculating its predetermined overhead rate, a firm incorrectly called some items of indirect labour 'direct labour'. Since the firm uses direct labour costs as the basis for application of overhead costs, the effect of this error is to
A) underestimate the overhead rate.
B) overestimate the overhead rate.
C) underestimate direct labour costs.
D) underestimate the denominator used for allocating overhead.

Question

Quizplus · Accepted Answer

By incorrectly classifying indirect labor as direct labor, the direct labor costs are overstated, leading to an underestimation of the overhead rate since the overhead is spread over a larger base.

In Calculating Its Predetermined Overhead Rate, a Firm Incorrectly Called