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Samanca Cabinets makes custom wooden cabinets for high-end stereo systems from specialty woods. The company uses a job-order costing system. The capacity of the plant is determined by the capacity of its constraint, which is time on the automated handsaw that makes finely beveled cuts in wood according to the preprogrammed specifications of each cabinet. The handsaw can operate up to 150 hours per month. The estimated total manufacturing overhead at capacity is $11,000 per month. The company bases its predetermined overhead rate on capacity, so its predetermined overhead rate is$74 per hour of bandsaw use. The results of a recent month's operations appear below:

Sales$ 39.860Beginning inventories$ 0Ending inventories$ 0Direct materials$ 4.820Direct labor (all variable)$ 9.640Manufacturing overhead incurred$ 10.870Selling and administrative expense$ 9.350Actual hours of bandsaw use124\begin{matrix} \text{Sales} & \text{\$ 39.860}\\ \text{Beginning inventories} & \text{\$ 0}\\ \text{Ending inventories} & \text{\$ 0}\\ \text{Direct materials} & \text{\$ 4.820}\\ \text{Direct labor (all variable)} & \text{\$ 9.640}\\ \text{Manufacturing overhead incurred} & \text{\$ 10.870}\\ \text{Selling and administrative expense} & \text{\$ 9.350}\\ \text{Actual hours of bandsaw use} & \text{124}\\ \end{matrix}

  1. Prepare an income statement following the example in Appendix 4B in which any under-applied overhead is directly recorded on the income statement as an expense. 2. Why is overhead ordinarily underapplied when the predetermined overhead rate is based on capacity?

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In this problem, we are required to prepare an income statement for Samanca Cabinets, and explain under-applied overhead.

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