Question 1

Use of practical capacity results in an unrealistically small fixed manufacturing cost per unit because it is based on an idealistic and unattainable level of capacity.

Accepted Answer

Use of theoretical capacity results in an unrealistically small fixed manufacturing cost per unit because it is based on an idealistic and unattainable level of capacity.

Question 2

U.S. tax reporting requires end-of-period reconciliation between actual and applied indirect costs using the adjusted allocation-rate method or the proration method.

Accepted Answer

This statement is true. The U.S. tax reporting requires end-of-period reconciliation between actual and applied indirect costs using the adjusted allocation-rate method or the proration method. Indirect costs are those expenses that are not directly associated with a specific project or product, such as rent, utilities, and administrative salaries. The adjusted allocation-rate method allocates indirect costs based on a predetermined rate, while the proration method allocates costs based on the proportion of each cost item to total costs. Both methods require a reconciliation between actual and applied costs to ensure accuracy and compliance with tax laws.

Question 3

Customers expect to pay a price that includes ________.

Accepted Answer

Customers typically expect to pay for the actual capacity used, rather than the cost of unused capacity. This is because they only benefit from and use the capacity that they require, so do not see the value in paying for unused capacity.

Question 4

Adjusted allocation-rate approach restates all amounts in the general and subsidiary ledgers by using actual rather than budgeted cost rates.

Accepted Answer

The statement describes the adjusted allocation-rate approach accurately.

Question 5

For financial reporting, SFAS 151 requires:

Accepted Answer

SFAS 151 requires the allocation of fixed manufacturing overhead to production based on normal capacity of the facilities. Normal capacity is defined as the average production capacity over a longer period of time, such as several years, and should exclude abnormal or inefficient periods. This basis of allocation is considered to be the most appropriate as it reflects the steady state of operations and provides a more accurate representation of the true costs of production.

Question 6

For benchmarking purposes for long-range planning, it is best to use master-budget capacity because all competitors use about the same about of capacity for production.

Accepted Answer

For benchmarking purposes it is best to use practical capacity because it best represents the long-run cost of capacity.

Question 7

________ is the continuing reduction in the demand for a company's products that occurs when competitor prices are not met.

Accepted Answer

A downward demand spiral refers to the situation where a company's failure to match competitor prices results in a continued reduction in demand for their products. As a result, the company may experience a loss in market share and revenue, and may find it difficult to regain its competitive position. Competitor pricing pressure and continuous step down demand are not specific terms in this context, and super-demand cutback is not a recognized term at all.

Question 8

The marketing manager's performance evaluation is most fair when based on a denominator level using ________ as it is the principal short-run planning and control tool.

Accepted Answer

The master-budget capacity utilization is the most appropriate denominator level for evaluating a marketing manager's performance because it reflects the expected level of capacity utilization based on the company's budget, making it a principal tool for short-run planning and control. This approach aligns the manager's performance evaluation with the organization's financial planning and operational expectations.

Question 9

Using master budget capacity as the denominator level sets the cost of capacity at the cost of supplying the capacity, regardless of the demand for the capacity.

Accepted Answer

Using practical capacity as the denominator level sets the cost of capacity at the cost of supplying the capacity, regardless of the demand for the capacity.

Question 10

Using practical capacity is best for evaluating the marketing manager's performance for a particular year.

Accepted Answer

Using master-budget capacity is best for evaluating the marketing manager's performance.

Question 11

Operating income reported on the end-of-period financial statements is changed when ________ is used to handle the production-volume variance at the end of the accounting period.

Accepted Answer

The write-off variances to cost of goods sold approach directly affects operating income because it adjusts the cost of goods sold, which is a component of the income statement, thereby impacting the reported operating income.

Question 12

Using practical capacity as the denominator level sets the cost of capacity at the cost of supplying the capacity, regardless of the demand for the capacity.

Accepted Answer

Practical capacity represents the maximum amount of output that a company can produce under normal operating conditions, taking into account any expected interruptions such as maintenance or downtime. By using practical capacity as the denominator level, companies are not accounting for the actual demand for their product, but rather the potential supply. This means that the cost of capacity is set based on the cost of supplying the capacity, regardless of whether that capacity is fully utilized or not. Therefore, the statement is true.

Question 13

The downward demand spiral happens when a company cannot meet competitors prices are not met as because of underutilzied capacity, higher and higher unit costs result is a greater reluctance to meet competitors' prices.

Accepted Answer

The downward demand spiral is a concept in economics where higher unit costs lead to higher prices, which in turn leads to lower demand, causing even higher unit costs. This cycle can continue in a downward spiral if the company cannot find a way to reduce costs or increase demand. It is true that if a company cannot meet competitors' prices due to underutilized capacity or other reasons, it may result in higher unit costs and a greater reluctance to match competitors' prices, which can contribute to the downward demand spiral.

Question 14

Which of the following is true about what the Internal Revenue Service requires for calculating indirect manufacturing costs per unit?

Accepted Answer

The Internal Revenue Service requires a method which fairly apportions indirect production costs among the various items produced. This is typically done using a cost driver, such as machine hours or direct labor hours. The IRS does not specify the use of theoretical capacity or master-budget capacity utilization, but rather requires the use of a method that is fair and reasonable in allocating indirect manufacturing costs. Normal capacity utilization may be used, but it is not specifically required by the IRS.

Question 15

Which of the following approaches spreads underallocated or overallocated overhead among ending balances in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold?

Accepted Answer

The proration approach spreads underallocated or overallocated overhead among ending balances in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold based on their respective ending balances. This method is commonly used for small or non-complex production processes where the allocation rate is not continuously changing. The adjusted allocation-rate approach adjusts the allocation rate for the next period, the write-off variances to cost of goods sold approach writes off the variances directly to COGS, and the reinstatement approach reinstates underallocated or overallocated overhead to the subsequent periods.

Question 16

Practical capacity rather than master-budget volume is a better way to price product and avoid downward demand spiral.

Accepted Answer

Practical capacity is the maximum amount of output that a company can produce under normal working conditions. Pricing based on practical capacity rather than master-budget volume ensures that the price is based on the actual cost of production, which includes both fixed and variable costs. This helps to prevent demand from declining due to excessive pricing, which can lead to a downward demand spiral. Therefore, practical capacity is a better way to price products.

Question 17

The effect of spreading fixed manufacturing costs over a shrinking master-budget capacity utilization amount results in ________.

Accepted Answer

Spreading fixed manufacturing costs over a shrinking master-budget capacity utilization amount results in increased unit costs. This is because fixed costs are spread over a smaller number of units, resulting in higher costs per unit.

Question 18

Proration approach restates all amounts in the general and subsidiary ledgers by using actual rather than budgeted cost rates.

Accepted Answer

Adjusted allocation-rate approach restates all amounts in the general and subsidiary ledgers by using actual rather than budgeted cost rates.

Question 19

Using master-budget capacity to allocate budgeted fixed manufacturing costs can result in a

Accepted Answer

The answer of Using master-budget capacity to allocate budgeted fixed...

Question 20

In planning and control of capacity costs, managers must consider possible capacity measures. Which of the following measures the available supply of capacity in a factory?

Accepted Answer

The answer of In planning and control of capacity costs,...

Quiz 9: Inventory Costing and Capacity Analysis

Use of practical capacity results in an unrealistically small fixed manufacturing cost per unit because it is based on an idealistic and unattainable level of capacity.

U.S. tax reporting requires end-of-period reconciliation between actual and applied indirect costs using the adjusted allocation-rate method or the proration method.

Customers expect to pay a price that includes ________.

Adjusted allocation-rate approach restates all amounts in the general and subsidiary ledgers by using actual rather than budgeted cost rates.

For financial reporting, SFAS 151 requires:

For benchmarking purposes for long-range planning, it is best to use master-budget capacity because all competitors use about the same about of capacity for production.

________ is the continuing reduction in the demand for a company's products that occurs when competitor prices are not met.

The marketing manager's performance evaluation is most fair when based on a denominator level using ________ as it is the principal short-run planning and control tool.

Using master budget capacity as the denominator level sets the cost of capacity at the cost of supplying the capacity, regardless of the demand for the capacity.

Using practical capacity is best for evaluating the marketing manager's performance for a particular year.

Operating income reported on the end-of-period financial statements is changed when ________ is used to handle the production-volume variance at the end of the accounting period.

Using practical capacity as the denominator level sets the cost of capacity at the cost of supplying the capacity, regardless of the demand for the capacity.

The downward demand spiral happens when a company cannot meet competitors prices are not met as because of underutilzied capacity, higher and higher unit costs result is a greater reluctance to meet competitors' prices.

Which of the following is true about what the Internal Revenue Service requires for calculating indirect manufacturing costs per unit?

Which of the following approaches spreads underallocated or overallocated overhead among ending balances in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold?

Practical capacity rather than master-budget volume is a better way to price product and avoid downward demand spiral.

The effect of spreading fixed manufacturing costs over a shrinking master-budget capacity utilization amount results in ________.

Proration approach restates all amounts in the general and subsidiary ledgers by using actual rather than budgeted cost rates.

Using master-budget capacity to allocate budgeted fixed manufacturing costs can result in a

In planning and control of capacity costs, managers must consider possible capacity measures. Which of the following measures the available supply of capacity in a factory?