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Cost of unused capacity

Question 9:

(Appendix 3A) At the beginning of the current year, Garber Corporation estimated that its manufacturing overhead would be $532,000 and the activity level would be 23,000 machine-hours. The level of activity at capacity is 40,000 machine-hours. The actual manufacturing overhead for the year was $504,900 and the actual level of activity was 23,100 machine-hours.

Assume for the purposes of this question only that the actual manufacturing overhead for the year was $532,000 and was entirely fixed. If the company bases its predetermined overhead rate on machine-hours at capacity, then the cost of unused capacity reported on the income statement would have been:

$16,900

$224,770

$201,670

$219,430

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We first calculate the predetermined overhead rate based on machine hours are ...

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The solution explains how to calculate the cost of unused capacity

$2.19