Question

21. At the end of the year, overhead applied was $42,000,000. Actual overhead was $40,300,000. Closing over/underapplied overhead into Cost of Goods Sold would cause net income to a. increase by $1,700,000 b. decrease by $1,700,000 c. increase by $3,400,000 d. decrease by $3,400,000

Answer 1

Answer:

b. decrease by $1,700,000

Explanation:

At the end of the year, overhead applied was $42,000,000.

Actual overhead was $40,300,000.

Closing over/underapplied overhead into Cost of Goods Sold would cause

net income b. decrease by $1,700,000

An increase in the inventory ($42,000,000-$40,300,000)  $1,700,000 would cause the inventory to be overstated by the amount  $1,700,000 hence decreasing the income statement by the same amount.