Asked by Mayesha Tanjeen on May 30, 2024
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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 12,000 machine-hours and the actual level of activity for the year is assumed to be 9,500 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 $12,000 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) $2,000
B) $2,500
C) $1,900
D) $600
Predetermined Overhead Rate
An estimated rate used to allocate overhead costs to products or services, based on a selected activity base such as machine-hours or labor-hours.
Machine-Hours
A measure of production time using machinery, often used as a basis for allocating manufacturing overhead costs.
Unused Capacity
The available but unutilized production capability of a firm which could generate revenue if employed.
- Calculate established overhead rates by employing a variety of determinants, including machine-hours, direct labor-hours, and capacity.
- Acknowledge the expense related to idle capacity and its impact on financial assessments.
- Gain an understanding of the fiscal outcomes of leveraging capacity in the determination of preset overhead rates.
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Learning Objectives
- Calculate established overhead rates by employing a variety of determinants, including machine-hours, direct labor-hours, and capacity.
- Acknowledge the expense related to idle capacity and its impact on financial assessments.
- Gain an understanding of the fiscal outcomes of leveraging capacity in the determination of preset overhead rates.
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