Question :

Explain the purpose of this analysis to management and the information it provides in relation to capacity utilization.

Example 2.3e: Cost of idle capacity at Henry Co. The cutting department at Henry Co. can be used to illustrate. Recall that the estimated manufacturing overhead was $400,000. Suppose the practical capacity of the cutting department is 6,000 machine hours. If practical capacity were used to compute the manufacturing overhead rate, the rate would be $66.67 (400,000 + 6,000) per machine hour. The following is a summary of what might be reported if the actual machine hours recorded were 4,500 hours and the actual manufacturing overhead was $425,000. Cutting department manufacturing overhead cost summary Actual manufacturing overhead cost $425,000.00 Planned operations Expected manufacturing overhead cost $400,000.00 Practical capacity 6,000 Manufacturing overhead rate at practical capacity $66.67 Expected capacity use 5,000 Planned manufacturing overhead allocation 333,333.33 Planned idle capacity cost $ 66,666.67 Actual capacity use 4,500 Actual manufacturing overhead allocation based on practical capacity 300,000.00 Underapplied manufacturing overhead based on practical capacity $125,000.00 Summary of underapplied overhead Planned idle capacity cost $ 66,666.67 Unplanned idle capacity cost 33,333.33 Manufacturing overhead excess spending 25,000.00 Total underapplied manufacturing overhead at practical capacity $125,000.00