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:

Surface Structure

In linguistics, the outward form of a sentence, which can vary without changing the core meaning.

Deep Structure

A concept in linguistics, referring to the underlying syntactic structure or meaning of a sentence, as opposed to its surface structure.

Transformational Grammar

A linguistic theory proposed by Noam Chomsky that describes how deep structures of language are transformed into surface structures.

Deep Structure

In linguistics, the underlying syntactic structure or meaning of a sentence, as opposed to its surface form.