Zackery 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 lathe. 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:

Question

Zackery 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 lathe. 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:

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 = $7,452 ÷ 230 hours = $32.40 per hour
Cost of unused capacity = (Amount of the allocation base at capacity − Actual amount of the allocation base) × Predetermined overhead rate = (230 hours − 180 hours) × $32.40 per hour = $1,620

Zackery Woodworking Corporation Produces Fine Cabinets