1. Peking Corp.’s cost accountant is planning the year-end review of production
ID: 2518824 • Letter: 1
Question
1. Peking Corp.’s cost accountant is planning the year-end review of production costs. One
of the areas for review is the analysis of plant capacity and application of overhead.
Peking’s plant has an annual theoretical capacity of 5,000 machine hours. However, the
plant manager has determined that practical capacity of 85% of theoretical capacity is the
best measure of capacity usage.
At the beginning of the year, the budget committee had determined the following:
Estimated manufacturing overhead $600,000
Expected capacity usage 80% of practical capacity
At the end of the year, the cost accountant was able to determine the following:
Actual manufacturing overhead $550,000
Actual capacity usage 3,000 machine hours
Which of the following statements is true at the end of the year?
a) Manufacturing overhead is underapplied by $50,000 and unplanned idle capacity is $282,353.
b) Planned idle capacity cost is $120,000 and manufacturing overhead spending is $176,471 more than budget.
c) Manufacturing overhead is underapplied by $126,471 and unplanned idle capacity is $56,471.
d) Planned idle capacity cost is $423,529 and manufacturing overhead spending is $50,000 less than budget.
Explanation / Answer
The correct answer is option b
as the estimated cost is 600,000 the number of hours = 5000
therfore the cost of idle capcity is 20% of 600,000 = $120,000
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