Wixis Cabinets makes custom wooden cabinets for high-end stereo systems from spe

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:

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?

   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?

Explanation / Answer

Answer -

1a) Income statement that records cost of unused capacity

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

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

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