Magnum Company uses direct labor cost as a basis for computing its predetermined overhead rate. In computing the predetermined overhead rate for 2020, the company misclassified a portion of direct labor cost as indirect labor. The effect of this misclassification will be to:
A) understate the predetermined overhead rate.
B) overstate the predetermined overhead rate.
C) there will be no effect on the predetermined overhead rate.
D) Can't tell from the information provided.

Question

Quizplus · Accepted Answer

The misclassification of direct labor cost as indirect labor will result in a higher denominator in the calculation of the predetermined overhead rate, which will lead to a lower overhead rate.

Magnum Company Uses Direct Labor Cost as a Basis for Computing