When the predetermined overhead rate is based on the level of activity at capacity, an item called the Cost of Unused Capacity may appear to be treated as a period expense on income statements prepared for internal management use.

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The Cost of Unused Capacity is considered a period expense because it represents the fixed costs that are incurred even when production levels are below full capacity. As such, it is not directly related to the production of a specific product and is therefore treated as a period expense on internal management income statements.

When the Predetermined Overhead Rate Is Based on the Level