Question

NE Saved Help Save & Bar Submit 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 49.000 $1855,000 24 If the company bases its predetermined overhead rate on capacity, then how much would they show as the cost of unused capactyon their income statement? (Do not add a comma in a number, e.g., write 1000 for one thousand) Cost of unused capacity = $

Answer 1

Calculation of Predetermined Overhead Rate on Capacity:

Predetermined Overhead Rate = Manufacturing Overhead / Capacity Machine Hours

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

= $35 per hour on machine

Calculation of Cost of Unused Capacity:

Unused Capacity = Capacity Machine Hours - Actual Machine Hours

= 53,000 - 49,000

= 4,000 machine hours

Cost of Unused Capacity = Unused Capacity * Predetermined Overhead Rate

= 4,000 machine hours * $35

= $140,000.