The Management of Krach Corporation Would Like to Investigate the Possibility

question 130

Multiple Choice

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

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Definitions:

Manufacturing Business

A type of business that produces finished goods from raw materials by using various forms of machinery and human labor in a process known as manufacturing.

Factory Overhead

All the overhead costs related to the production process, except for the expenses on direct materials and direct labor.

Cost of Goods Sold

The direct costs attributed to the production of the goods sold by a company, including the cost of the materials and labor directly used to create the product.

Predetermined Overhead Rate

An estimated rate used to allocate manufacturing overhead costs to individual units of production.