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 181 hours per month. The estimated total manufacturing overhead cost at capacity is $14,480 per month. The company bases its predetermined overhead rate on capacity, so its predetermined overhead rate is $80 per hour of bandsaw use.

  

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

Sales	$	43,780
Beginning inventories	$	0
Ending inventories	$	0
Direct materials	$	5,350
Direct labor	$	8,820
Manufacturing overhead incurred	$	14,300
Selling and administrative expense	$	8,160
Actual hours of bandsaw use		151

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