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 $425,000.00 Actual manufacturing overhead cost $400,000.00 6,000 $66.67 5,000 Planned operations Expected manufacturing overhead cost Practical capacity Manufacturing overhead rate at practical capacity Expected capacity use Planned manufacturing overhead allocation Planned idle capacity cost Actual capacity use Actual manufacturing overhead allocation based on practical capacity Underapplied manufacturing overhead based on practical capacity 333,333.33 $ 66,666.67 4,500 300,000.00 $125,000.00 Summary of underapplied overhead Planned idle capacity cost Unplanned idle capacity cost Manufacturing overhead excess spending Total underapplied manufacturing overhead at practical capacity $ 66,666.67 33.333.33 25,000.00 $125,000.00