The biggest advantage of using practical capacity to allocate costs is that it:
A)is a value that is readily available
B)never causes over or under-allocated overhead
C)burdens the user divisions with the costs of unused capacity
D)focuses management's attention on unused capacity

Question

Quizplus · Accepted Answer

Practical capacity is the maximum output or service that can be produced or provided by a firm given its resources. By allocating costs based on practical capacity, management's attention is directed to unused capacity, and they can take necessary steps to reduce it, thereby improving efficiency and productivity. This approach ensures that costs are allocated based on the actual usage of capacity, which can help avoid over- or under-allocated overhead costs. It does not burden the user divisions with the costs of unused capacity, as these costs are not allocated to them. Therefore, option D is the correct choice.

The Biggest Advantage of Using Practical Capacity to Allocate Costs