Question

     Huda Corporation’s accounting information system showed the following balances at the end    

      of this period:

Work in process               $40,000

Finished goods                   60,000

Cost of goods sold            100,000

      Miss-applied overhead this period totaled $60,000; Huda maintains a single overhead account in its general ledger. If the miss-applied overhead is considered material

      Discuss why you could have Misallocated Overhead?

Answer 1

Ans :There could be two scenarios overallocation of overhead or underground allocation of overhead. The overallocation of overhead is done with the object of reducing the current year taxable profit and get the tax liability down whereas undur allpcation of overhead is done with the object of window dressing the financials and improve current year profit by referring expenses to future period. It is done to attract the stake holders and potential investors.