In Calculating Its Predetermined Overhead Rate, a Firm Incorrectly Called

question 53

Multiple Choice

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.

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Definitions:

Par Value

The nominal or face value of a bond, share of stock, or coupon as stated by the issuer; it is not indicative of the security's market value.

Semiannually

Happening biannually or once every six months.

Market Interest Rate

The prevailing rate of interest available in the market on debt, which varies with market conditions and the term and risk of the investment.

Debt-To-Equity Ratio

An indicator of how a company's assets are financed, comparing the use of debt to shareholders' equity.