Question

Prior to 2017, Heberling Inc. excluded manufacturing overhead costs from work in process and finished goods inventory. These costs have been expensed as incurred. In 2017, the company decided to change its accounting methods for manufacturing inventories to full costing by including these costs as product costs. Assuming that these costs are material, how should this change be reflected in the financial statements for 2016 and 2017?

Short answer

An accounting error is the omission of principles, and the change mentioned above will be reflected as the restatement of the opening balance of retained earnings for the year 2017.

Step-by-step solution

Definition of an accounting error

An accounting error is defined as the omission of any fundamental accounting principles in the financial statement of the business.

Explanation of the effect of change

The change made in this problem is the change in accounting principle, which is not generally accepted. So, this change should be considered as the correction of the error. Therefore, this change should be corrected by the restatement or alteration of the beginning balance of the retained earnings.