Question

In computing its predetermined overhead rate, Brady Company neglected to include its factory insurance cost. This error will result in:
(a)-The ending balance of Finished Goods inventory to be overstated.
(b)-The cost of goods sold to be understated.
(c)-The cost of goods sold to be overstated.
(d)-Net operating income to be understated

Answer 1

Answer:

The correct answer is the letter b. “The cost of goods sold to be understated.”

Explanation:

In calculating its indirect profit rate, Brady Company no longer included a cost component. By dividing the total cost by the products sold, the cost of each individual product will be underestimated, this will underestimate all the production sold, meaning the costs of the products will appear to be lower than they really are, and your profits will appear to be higher than they really are.