Fab Technologies uses practical capacity to allocate its overhead costs to products, using machine hours. In 2014, the company’s overhead rate was $300 per hour machine. The total overhead cost was $3,000,000. The total machine hours used to make products for clients equaled 8,000. What was the cost of unused capacity in 2014?
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To find the cost of unused capacity, we first need to calculate the total overhead cost based on the practical capacity (total machine hours at full capacity) and then determine the difference between the actual overhead cost and the cost at full practical capacity.
Given:
Overhead rate = $300 per machine hour
Total overhead cost = $3,000,000
Total machine hours used = 8,000
First, let's find the total overhead cost at full practical capacity:
Total overhead cost at full practical capacity = Overhead rate × Total machine hours at full capacity
Total machine hours at full capacity can be calculated by multiplying the overhead cost by the inverse of the overhead rate:
Total machine hours at full capacity = Total overhead cost / Overhead rate
Total machine hours at full capacity = $3,000,000 / $300 per machine hour
Total machine hours at full capacity = 10,000 hours
Now, let's find the cost of unused capacity:
Unused capacity = Total overhead cost at full practical capacity - Actual total overhead cost
Unused capacity = Total overhead cost at full practical capacity - Total overhead cost actually incurred
Unused capacity = (Overhead rate × Total machine hours at full capacity) - Total overhead cost
Unused capacity = ($300 per machine hour × 10,000 machine hours) - $3,000,000
Unused capacity = $3,000,000 - $3,000,000
Unused capacity = $0
The cost of unused capacity in 2014 was $0. This implies that the company used all its overhead capacity based on practical capacity, and there was no excess capacity that remained unused.