The practical capacity method of allocating costs is:
A)based on the budgeted capacity demanded.
B)based on actual capacity used.
C)based on the practical capacity supplied.
D)based on the using departments negotiating the charges they will accept.

Question

Quizplus · Accepted Answer

The practical capacity method of allocating costs is based on the practical capacity supplied, which is the highest level of output volume or units that a company can sustain within the normal course of business. This method is different from the budgeted capacity method, which is based on the budgeted capacity demanded, and the actual capacity method, which is based on actual capacity used. The practical capacity method is more accurate and fair as it reflects the true capacity of the company and allows for better cost management. The using departments do not negotiate the charges in this method.

The Practical Capacity Method of Allocating Costs Is