Asked by Brett Blahnik on Jul 13, 2024
Verified
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 10,000 machine-hours. Capacity is 16,000 machine-hours and the actual level of activity for the year is assumed to be 8,000 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 $40,000 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?
A) $6,000
B) $20,000
C) $5,000
D) $25,000
Predetermined Overhead Rate
An estimated rate used to allocate manufacturing overhead costs to individual units of production, based on a selected activity base such as machine hours or labor hours.
Machine-Hours
A unit of measure that represents the operational time of a machine, often used to allocate manufacturing overhead costs to products.
Unused Capacity
The available production or service facility that is not being used or is underutilized.
- Establish the predetermined rates for overhead based on diverse bases like machine-hours, direct labor-hours, and capacity.
- Apprehend the financial strain of underutilized capacity and its repercussions on financial disclosures.
- Apprehend the financial repercussions of basing the predetermined overhead rate computation on capacity.
Verified Answer
To calculate the manufacturing overhead cost incurred for the actual level of activity, we use the formula Manufacturing Overhead Cost = Predetermined Overhead Rate x Actual Activity. In this case, the actual activity is 8,000 machine-hours. Therefore, the manufacturing overhead cost incurred is $2.50 per machine-hour x 8,000 machine-hours = $20,000.
To calculate the cost of unused capacity, we first calculate the manufacturing overhead cost that would have been incurred at capacity by multiplying the predetermined overhead rate by the amount of capacity not used. In this case, the amount of capacity not used is 16,000 machine-hours - 8,000 machine-hours = 8,000 machine-hours. Therefore, the manufacturing overhead cost for unused capacity is $2.50 per machine-hour x 8,000 machine-hours = $20,000.
Therefore, the cost of unused capacity reported on the income statement prepared for internal management purposes is $20,000.
Learning Objectives
- Establish the predetermined rates for overhead based on diverse bases like machine-hours, direct labor-hours, and capacity.
- Apprehend the financial strain of underutilized capacity and its repercussions on financial disclosures.
- Apprehend the financial repercussions of basing the predetermined overhead rate computation on capacity.
Related questions
The Management of Krach Corporation Would Like to Investigate the ...
Gilchrist Corporation Bases Its Predetermined Overhead Rate on the Estimated ...
Gilchrist Corporation Bases Its Predetermined Overhead Rate on the Estimated ...
Brothern Corporation Bases Its Predetermined Overhead Rate on the Estimated ...
Valvano Corporation Uses a Job-Order Costing System with a Single ...