Dr. Ilyasova and Fellow Classmates, Actually to shave 5% off the expected direct labor hours in the destined overhead rate here will consequence in an increase in the net operating income because it will cause to the high overhead rate. The overhead rate of products is calculated by dividing the total estimated manufacturing overhead cost for the period by the estimated total amount of the allocation base and the formula of that is:
Predetermined overhead rate= estimated total manufacturing overhead cost / estimated total of allocation base

Indeed, it is calculated before period begins using several procedures: * Estimate the total amount of allocation base, * Then, estimate total fixed manufacturing overhead cost for period and total variable manufacturing overhead cost per unit of the allocation base. * The following equation is used to estimate the total amount of manufacturing overhead: Y = a + bX (Y = the estimated total manufacturing overhead cost, a= the estimated total fixed manufacturing overhead cost, b= the estimated variable manufacturing overhead cost per unit of the allocation base, and X= the estimated total amount of the allocation base). * Finally, calculate predetermined overhead rate.

Obviously, the high-predetermined overhead rate will lead to an over applied overhead and the impact of that will known at the end of the fiscal year, which is December when the balance of the manufacturing overhead is closed out to the cost of goods sold.

According to the second question that I think if the Terri discuss this situation with her supervisor at the headquarters; however, if she did that she will open a problem with here general manager who actually suggested that “cutting the overhead rate from 440,000 to 420,000 in order to increase the profit”. So, the decision here will depend on Terri. In addition, the general