Traeger Woodworking Corporation produces fine cabinets.The company uses a job-order costing system in which its predetermined overhead rate is based on capacity.The capacity of the factory is determined by the capacity of its constraint,which is an automated bandsaw.Additional information is provided below for the most recent month:
The cost of unused capacity that would be reported as a period expense on the income statement prepared for internal management purposes would be closest to:
A) $1,924
B) $18,136
C) $0
D) $18,765

Question

Traeger Woodworking Corporation produces fine cabinets.The company uses a job-order costing system in which its predetermined overhead rate is based on capacity.The capacity of the factory is determined by the capacity of its constraint,which is an automated bandsaw.Additional information is provided below for the most recent month:
 The cost of unused capacity that would be reported as a period expense on the income statement prepared for internal management purposes would be closest to:
A) $1,924 
B) $18,136 
C) $0 
D) $18,765

Quizplus · Accepted Answer

Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = $26,936 ÷ 280 hours = $96.20 per hour
Cost of unused capacity = (Amount of the allocation base at capacity − Actual amount of the allocation base) × Predetermined overhead rate = (280 hours − 260 hours) × $96.20 per hour = $1,924

Traeger Woodworking Corporation Produces Fine Cabinets