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. Machine Hours Manufacturing Overhead Estimated 50,000 $1,855,000 Capacity 53,000 $1,855,000 Actual 51,000 $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

Predetermined overhead rate	=	Total Overhead cost at capacity / Total macine hours capacity
	=	$1855000 / 53000
	=	$                                                                             35
Cost of unused capacity	=	(Capacity machine hours - Actual macine hours) X predetermined overhead rate
	=	(53000 - 51000) X $35
	=	$                                                                     70,000
Therefore,
Cost of unused capacity	=	$                                                                     70,000