Question

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. Estimated Capacity 50,000 53,000 $1,855,000 $1,855,000 Actual 50,000 Machine Hours Manufacturing Overhead $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

Cost of unused capacity=(Machine hours at capacity-Actual machine hours)*Predetermined overhead rate

Predetermined overhead rate=Estimated manufacturing overheads/ Machine hours at capacity
Predetermined overhead rate=1,855,000/50,000

Predetermined overhead rate=37.1
Cost of unused capacity=(53,000-50,000)*37.1

Cost of unused capacity=3,000*37.1

Cost of unused capacity=$111,300