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

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When the predetermined overhead rate is based on the level of activity at capacity, it assumes that the company will operate at full capacity. Therefore, any unused capacity will result in a cost that is not necessary for producing goods or services. This cost may be treated as a period expense on income statements prepared for internal management use.

When the Predetermined Overhead Rate Is Based on the Level