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 188 hours per month. The estimated total manufacturing overhead cost at capacity is $15,228 per month. The company bases its predetermined overhead rate on capacity, so its predetermined overhead rate is $81 per hour of bandsaw use.

  

The results of a recent month’s operations appear below:

Sales	$	43,720
Beginning inventories	$	0
Ending inventories	$	0
Direct materials	$	5,350
Direct labor	$	8,880
Manufacturing overhead incurred	$	14,280
Selling and administrative expense	$	8,240
Actual hours of bandsaw use		158
Required: 1-a. Prepare an income statement that records the cost of unused capacity on the income statement as a period expense. 1-b. How much of the cost of unused capacity can be shown on the income statement as a period expense?

Answer 1

Answer -

1a) Income statement that records cost of unused capacity

Particulars	Amount	Amount
Sales		43,720
Less: Cost of Goods Sold
Direct Materials	5,350
Direct Labour	8,880
Manufacturing Overhead (158hours * $81)	12,798	27,028
Gross Profit		16,692
Cost of unused capacity (See 1b)	2,430
Selling and Admin Expenses	8,240	10,670
Net Operating Income		6,022

1b) Cost of Unused capacity that can be shown in income statement as a period expense

Hours at full capacity	188
Actual Hours	158
Unused capacity in hours (A)	30
Pre-determined overhead rate (B)	81
Cost of unused Capacity (A*B)	2,430