Question

The management of Krach Corporation 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. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 13,000 machine-hours. Capacity is 19,000 machine-hours and the actual level of activity for the year is assumed to be 9500 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $22,800 per year. For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity. It is further assumed that this is also the actual amount of manufacturing overhead for the year. If the company bases its predetermined overhead rate on capacity, what would be the cost of unused capacity reported on the income statement prepared for internal management purposes

Answer 1

Answer:

the cost of the unused capacity reported is $11,400

Explanation:

The computation of the cost of the unused capacity reported is as follows:

= (Estimated amount of overhead ÷ capacity machine hours) × (capacity machine hours - actual machine hours)

= ($22,800 ÷ 19,000 machine hours) × (19,000 - 9,500)

= $1.2 × (9,500)

= $11,400

hence, the cost of the unused capacity reported is $11,400