Howard Lumber Company mistakenly classified a product cost as an expense that totaled $20,000.The company produced 2,000 units of product and sold 1,000 of them during the year.Management is paid a bonus equal to 2% of net income.In the year in which the mistake was made:

Question

Quizplus · Accepted Answer

Classifying a product cost as an expense reduces net income because expenses are deducted from revenues to calculate net income. Since management bonuses are based on net income, underreporting net income means management bonuses were underpaid.

Howard Lumber Company Mistakenly Classified a Product Cost as an Expense