Question

Wixis Cabinets makes custom wooden cabinets for high-end stereo systems from specialty woods. The company uses a job-order costing system. The capacity of the plant is determined by the capacity of its constraint, which is time on the automated bandsaw that makes finely beveled cuts in wood according to the preprogrammed specifications of each cabinet. The bandsaw can operate up to 180 hours per month. The estimated total manufacturing overhead cost at capacity is $14,760 per month. The company bases its predetermined overhead rate on capacity, so its predetermined overhead rate is $82 per hour of bandsaw use. The results of a recent month’s operations appear below: Sales $ 43,740 Beginning inventories $ 0 Ending inventories $ 0 Direct materials $ 5,350 Direct labor $ 8,860 Manufacturing overhead incurred $ 14,760 Selling and administrative expense $ 8,180 Actual hours of bandsaw use 150 Required: 1-a. Using Exhibit 2B-1 as your guide, prepare an income statement for the month. Your income statement should include the cost of unused capacity as a period expense. 1-b. What was the cost of unused capacity during the month?

Answer 1

1-a
Wixis Cabinets Income Statement
Sales		$ 43,740
Less: Cost of Goods Sold		($ 26,510)
Gross Profit / Margin		$ 17,230
Other Expenses:
Selling and Administrative Expenses	$ 8,180
Cost of unused capacity	$ 2,460	($ 10,640)
Net Income / Net Operating Income		$ 6,590
Workings:
Cost of Goods Sold     = Direct Materials + Direct Labour + Applied Manufacturing Overhead      = $ 5,350 + $ 8,860 + (150 Hours x $ 82)      = $ 5,350 + $ 8,860 + $ 12,300	$ 26,510
1-b
Unused capacity in hours         = Actual Hours (-) Used hours          = (180 (-) 150)	30 Hours
Cost of unused Capacity        = Unused capacity Hours x Pre-determined overhead rate         = 30 x $ 82	$ 2,460