Question

Saved The management of a company would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company's controller has provided an example to illustrate how this new system would work, using machine hours as the allocation base. Machine Hours Manufacturing Overhead Estimated 50.000 $1,855,000 Capacity 53,000 $1.855,000 Actual 52.000 $1.855.000 If the company bases its predetermined overhead rate on capacity, then how much would they show as the cost of unused capacity on their income statement? (Do not add a comma in a number, e.g, write 1000 for one thousand.) Cost of unused capacity = $

Answer 1

Answer -

Cost of unused capacity = $35,000

Calculation:

As per given information, the company bases its predetermined overhead rate on capacity. And using machine hours as allocation based

So,

Predetermined overhead rate = Estimated manufacturing overhead costs at capacity / Estimated machine hours at capacity

= $1,855,000 / 53,000 machine hours

= $35 per machine hour

Now,

Applied manufacturing overhead costs = Actual machine hours * Predetermined overhead rate

= 52,000 machine hours * $35 per machine hour

= $1,820,000

Therefore,

Cost of unused capacity = Actual manufacturing overhead costs - Applied manufacturing overhead costs

= $1,855,000 - $1,820,000

= $35,000