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In 2017, Commodity Inc., processor of whole grain flour, had the capacity to produce 10,000,000...

Question:

In 2017, Commodity Inc., processor of whole grain flour, had the capacity to produce 10,000,000 pounds of product at a conversion cost per pound of $0.20. The conversion cost per pound was $0.15 in 2016 (the previous year). The direct material cost per pound for both years was $0.07 per pound and in 2017, Commodity Inc. produced 9,300,000 pounds while actual production for the previous year was 8,600,000 pounds.

What was the cost of unused capacity in 2017?

Unused Capacity:

The difference between the total capacity available to produce goods based on machine capacity working in normal conditions and the actual production is the idle or unused capacity. The reasons for unused capacity can be many like demand fluctuations, excess capacity, the product life cycle, economic conditions.

Answer and Explanation:

The information required to calculate the unused capacity cost

  • The total available capacity is 10,000,000 pounds in 2017
  • The actual capacity utilized is 9,300,000 pounds in 2017
  • The conversion cost is $0.20 in 2017

From the above information given the unused capacity cost is calculated below

  • Unused Capacity Cost = (total available capacity - actual capacity utilized) x conversion cost
  • Unused Capacity Cost = (10,000,000 - 9,300,000) x $0.20
  • Unused Capacity Cost = (10,000,000 - 9,300,000) x $0.20
  • Unused Capacity Cost = 700,000 x $0.20
  • Unused Capacity Cost = $140,000

The cost of unused capacity in 2017 is $140,000


Learn more about this topic:

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What is Idle Time in Cost Accounting?

from Financial Accounting: Tutoring Solution

Chapter 1 / Lesson 33
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