[meafunchic]

What effect does an increase in predetermined overhead rate have on on iventory value?

[arjeanetta]

You would get an estimated inventory balance instead of the actual balance.

[morgaine300]

arjeanetta, overhead rates are always based on estimates, and therefore when applied are still rather estimates. Increasing this estimate doesn't change an actual figure into an estimated figure. i.e. you aren't doing anything by a different method -- you're simply increasing the amount by which it's done.

As to the original question, which inventory? Think through the flow of inventories and whether the overhead rate affects it, and if so, how it affects it. Direct materials are put into WIP. Indirect materials are put into Overhead. Direct labor is put into WIP. Indirect labor is put into Overhead. Depreciation, supplies, etc. are put into overhead. Does applied overhead affect any of this? No, because those are all actual figures and that overhead rate hasn't been used yet.

Now that we have everything in overhead, we apply it to WIP. What would happen if the rate were increased? Would more or less be put into WIP? And how would that affect its balance? When it's finished, it's removed from WIP. Once you figure out whether WIP is higher or lower, that will then tell you whether what you're removing in costs from WIP is higher or lower. And that moves to Finished Goods, so how does it affect that?

Try to think through the flow of accounts. You need to know this flow anyway, and it'll be good for you to think through this.