Question

Wixis Cabinets makes custom wooden cabinets for high-end stereo systems from specialty woods. The company uses a job-order costing system. The capacity of the plant is determined by the capacity of its constraint, which is time on the automated bandsaw that makes finely beveled cuts in wood according to the preprogrammed specifications of each cabinet. The bandsaw can operate up to 181 hours per month. The estimated total manufacturing overhead cost at capacity is $14,842 per month. The company bases its predetermined overhead rate on capacity, so its predetermined overhead rate is $82 per hour of bandsaw use.

  

The results of a recent month’s operations appear below:

Sales	$	43,760
Beginning inventories	$	0
Ending inventories	$	0
Direct materials	$	5,320
Direct labor	$	8,800
Manufacturing overhead incurred	$	14,240
Selling and administrative expense	$	8,230
Actual hours of bandsaw use		151

Required:  

1-a. Prepare an income statement that records the cost of unused capacity on the income statement as a period expense.

1-b. How much of the cost of unused capacity can be shown on the income statement as a period expense?

Answer 1

Solution 1a:

Wixis cabinets
Income Statement
Sales		$43,760
Less: Cost of goods sold:
Direct Material	$5,320
Direct Labor	$8,800
Applied Manufacturing Overhead (151 Hours* $82)	$12,382
Cost of Goods sold		$26,502
Gross Profit		$17,258
Less: Expenses:
Selling and administrative Expenses		$8,230
Cost of unused capacity [(181 -151)* $842]		$2,460
Net operating income		$6,568

Solution 2:

Computation of Cost of Unused capacity
Full Capacity hours	181
Less: Actual Hours	151
Unused capacity in Hours	30
* Predetermined overhead rate	$82
Cost of Unused capacity	$2,460