Question 1

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

Accepted Answer

Downward demand spiral refers to the phenomenon where a company's demand for its products keeps decreasing as prices do not match up with competitor's prices. This leads to a fall in sales volume and revenue, affecting the company's financial health.

Question 2

'Theoretical capacity' is the capacity level that represents what the firm is able to obtain under reasonable circumstances.

Accepted Answer

'Theoretical capacity' refers to the maximum output that could possibly be achieved in an ideal scenario without any downtime, maintenance, or real-world constraints, rather than what is reasonably expected under normal circumstances.

Question 3

Budgeted fixed manufacturing costs of a product using practical capacity:

Accepted Answer

The answer of Budgeted fixed manufacturing costs of a product...

Question 4

Using budgeted capacity to set selling prices:

Accepted Answer

The answer of Using budgeted capacity to set selling prices:
...

Question 5

Theoretical capacity:

Accepted Answer

Theoretical capacity, when used for product costing, results in the lowest cost estimate because it assumes 100% efficiency and no downtime, spreading fixed costs over the maximum possible output.

Question 6

Managers cannot reduce the costs of capacity easily or quickly because they are fixed.

Accepted Answer

Capacity costs, such as the cost of equipment and facilities, are typically fixed and difficult to reduce quickly. Managers can try to improve utilization rates and efficiency, but it can take time to make significant cost reductions in capacity.

Question 7

The use of theoretical capacity results in an unrealistically low fixed manufacturing cost per unit because it is based on:

Accepted Answer

Theoretical capacity is based on the assumption that the production process is running at its maximum possible capacity without any downtime, breakdowns or any other interruptions. This level of capacity is unattainable in reality and is considered an ideal case. Therefore, using theoretical capacity as a basis for costing would result in an unrealistically low fixed manufacturing cost per unit, which is why it is not a practical measure.

Question 8

Theoretical capacity allows time for regular machine maintenance.

Accepted Answer

The answer of Theoretical capacity allows time for regular machine...

Question 9

What is the term used for the continuing reduction in the demand for a company's products that occurs when it fails to meet or better competitors' prices?

Accepted Answer

The term used for the continuing reduction in the demand for a company's products that occurs when it fails to meet or better competitors' prices is downward demand spiral. This occurs as customers shift to competitors' products, resulting in a further reduction in demand for the company's products.

Question 10

When managers measure capacity on the assumption that the entity is capable of producing at 100% efficiency all the time,that is,24 hours a day,seven days a week,this represents theoretical capacity.

Accepted Answer

The statement is true. Theoretical capacity is based on the assumption that the entity can produce at maximum efficiency without any interruptions or downtime.

Question 11

Normal capacity utilisation is the expected level of capacity utilisation for the current budget period,which is typically one year.

Accepted Answer

The answer of Normal capacity utilisation is the expected level...

Question 12

Managers frequently ________ their organisation's output cost structure against those of competitors.

Accepted Answer

Benchmarking involves comparing an organization's processes, products, or services against those of competitors in order to identify areas where improvements can be made. In this case, managers are comparing their organization's output cost structure to that of competitors, which is an example of benchmarking. Therefore, the best choice is C, benchmark.

Question 13

In business and accounting,'capacity' usually implies a constraint or an upper limit,which is not easily lifted,at least in the short run.

Accepted Answer

Capacity is usually a term used to refer to a maximum limit, which cannot be easily increased in the short term. This could refer to production capacity, staffing capacity, or other types of constraints on a business's ability to operate or grow.

Question 14

Wallace's Wrench Company manufactures socket wrenches.
∙ For next month,the vice CEO of production plans on producing 4400 wrenches per day.
∙ The company can produce as many as 5000 wrenches per day,but is more likely to produce 4500 per day.
∙ The demand for wrenches for the next three years is expected to average 4250 wrenches per day.
∙ Fixed manufacturing costs per month total $336 600.
∙ The company works 20 days a month.
∙ Fixed manufacturing overhead is charged on a per-wrench basis.
Required:
a.What is the theoretical fixed manufacturing overhead rate per wrench?
b.What is the practical fixed manufacturing overhead rate per wrench?
c.What is the normal fixed manufacturing overhead rate per wrench?
d.What is the budgeted fixed manufacturing overhead rate per wrench?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

The answer of Wallace's Wrench Company manufactures socket wrenches.
∙ For...

Question 15

'Budgeted capacity utilisation' is the level of capacity that managers expect to be used for the current budget period,which is typically one year.

Accepted Answer

Budgeted capacity utilisation is the level of capacity that managers plan or estimate to be used during the budgeted period, which is usually one year.

Question 16

From the perspective of long-run product costing,which of the following is the best to use?

Accepted Answer

Practical capacity is the best choice for long-run product costing as it considers the maximum output that can be achieved under normal working conditions, making it suitable for pricing decisions by reflecting the cost of resources used efficiently.

Question 17

Normal capacity utilisation:

Accepted Answer

Normal capacity utilisation can lead to higher cost estimates, which may result in setting higher selling prices that are not competitive in the market.

Question 18

Whether managers adopt theoretical capacity as an aspirational goal or not,they recognise that,in practice,operating interruptions (such as scheduled maintenance time,shutdowns for holidays and so on)are unavoidable.

Accepted Answer

The statement accurately reflects the understanding of managers that operating interruptions will occur despite any aspirational goals set based on theoretical capacity.

Question 19

Both theoretical and practical capacity measure capacity in terms of demand for the output.

Accepted Answer

Theoretical capacity measures the maximum output that could theoretically be achieved in a perfect world, while practical capacity takes into account real-world constraints such as maintenance and downtime, not directly demand for the output.

Question 20

________ capacity utilisation is an average that provides no meaningful feedback to a manager for a particular year.

Accepted Answer

Normal capacity utilisation takes into account expected downtime and allowances for inefficiencies, making it a more realistic benchmark for managers to assess their performance. Practical, theoretical, and master budget utilisation do not account for these factors and may not accurately reflect actual production performance.

Quiz 7: Target Costing, Managing Activities and Managing Capacity