Explain how shaving 5% off the estimated direct labor hours in the base for the predetermined overhead rate usually results in a big boost in net operating income at the end of the fiscal year.

becasue you have to add it back at the end of hte year

Shaving 5% off the estimated direct labor hours in the base for the predetermined overhead rate can result in a big boost in net operating income because it directly affects the allocation of overhead costs to products or services.

To understand this better, let's break it down into a few steps:

Step 1: Determining the Predetermined Overhead Rate
In order to allocate overhead costs to products or services, companies often use a predetermined overhead rate. This rate is calculated by estimating the total manufacturing overhead costs and dividing it by an estimated allocation base, which is typically direct labor hours.

Step 2: Calculating Overhead Costs
Once the predetermined overhead rate is determined, it is applied to each product or service based on the actual direct labor hours used. This helps to allocate a fair portion of the total overhead costs to each unit of production.

Step 3: Lowering Estimated Direct Labor Hours
When you shave 5% off the estimated direct labor hours in the base, you effectively reduce the percentage of overhead costs allocated to each unit of production. This is because the predetermined overhead rate is based on the estimated direct labor hours, and lowering the estimate reduces the allocation base.

Step 4: Impact on Net Operating Income
By reducing the allocation of overhead costs to each unit, the cost per unit decreases. This means that the company's expenses for producing each unit of product or delivering each service are lower. As a result, when the products or services are sold, the revenue generated per unit remains the same, but the cost per unit has decreased. This leads to an increase in gross margin per unit and, ultimately, an increase in net operating income.

So, shaving off 5% from the estimated direct labor hours in the base for the predetermined overhead rate can result in increased net operating income because it lowers the allocation of overhead costs, which in turn reduces the cost per unit and increases the gross margin per unit. This boost in profitability can be significant, especially when applied to a large volume of products or services over an entire fiscal year.