Which of the following types of capacity can result in an unrealistically small fixed overhead allocation rate if used as an allocation base?
A) Normal capacity
B) Theoretical capacity
C) Budgeted capacity
D) Practical capacity

Question

Quizplus · Accepted Answer

Theoretical capacity is the maximum output that can be achieved assuming perfect operating conditions, i.e., no downtime, no idle time, and no waste. However, this level of capacity is rarely achievable in practice, and using it as an allocation base can result in an unrealistically small fixed overhead allocation rate, leading to undercosting of products. Therefore, it is not an appropriate allocation base. Normal capacity, budgeted capacity, and practical capacity are more appropriate allocation bases, as they consider realistic levels of downtime, idle time, and waste.

Which of the Following Types of Capacity Can Result in an Unrealistically