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 182 hours per month. The estimated total manufacturing overhead cost at capacity is $14,742 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 $ 43,770 Beginning inventories $ 0 Ending inventories $ 0 Direct materials $ 5,340 Direct labor $ 8,870 Manufacturing overhead incurred $ 14,260 Selling and administrative expense $ 8,190 Actual hours of bandsaw use 152 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

Answer:

a) Wixis Cabinets

Income Statement

For the month ended on YY, 202x

Sales revenue                                   $43,770

- Cost of good sold                         ($26,522)

Gross profit                                        $17,248

Period expenses:

• S&A expense ($8,190)
• Unused capacity ($2,430)     ($10,620)

Operating profit                                 $6,628

b) cost of unused capacity $2,430

Explanation:

cost of goods sold = direct materials + direct labor + applied overhead = $5,340 + $8,870 + ($81 x 152 hours) = $26,522

cost of unused capacity = (budgeted machine hours - actual machine hours) x predetermined overhead rate = (182 - 152) x $81 = $2,430