Chapter 9 Inventory costing and capacity analysis

Question 1

a method if inventory costing in which all variable and fixed manufacturing costs are included as inventoriable costs. you can say that inventory “absorbs” all manufacturing costs

Answer 1

absorption cost

Question 2

a method of inventory costing in which all variable manufacturing costs (direct and indirect) are included as invariable costs

Answer 2

variable costs

Question 3

a method of inventory costing in which only direct materials are included as inventoriable costs. all other costs are expensed

Answer 3

throughput costing

Question 4

________ Costing is the required inventory method for external financial reporting in most countries (GAAP approved)

Answer 4

absorption costing

Answer 5

• it is cost-effective and less confusing (everything is built so that we use absorption costing that’s why its less confusing)
• it measures the cost of all manufacturing resources (variable or fixed) necessary to produce inventory
  -it can help prevent managers from taking actions that make their performance measure look good but that hurt

Question 6

an important attribute of absorption costing is that it enables

Question 7

a manager whose bonus is based on reported absorption costing income may be motivated to

Answer 7

build up an undesirable level of inventories

Question 8

to reduce the undesirable effects of absorption costing, management can:

Answer 8

1. use variable costing for internal reporting
2. focus on careful budgeting and inventory planning
3. incorporate an internal carrying charge for inventory
4. change (lengthen) the period of

Question 11

too much capacity means

Answer 11

firms will incur the cost of unused capacity

Question 12

too little capacity means

Answer 12

that demand from some customers may be unfulfilled

Question 13

the choice of capacity

Question 14

4 different capacity levels can be used as the denominator to compute the budgeted fixed manufacturing cost rate

Answer 14

1. theoretical capacity
2. practical capacity
3. normal capacity utilization
4. master budget capacity utilization

Question 15

• is the level of capacity based on producing at full efficiency all the time
• based on supply/inputs

Answer 15

theoretical capacity

Answer 16

theoretical capacity

Question 17

• ## is the level of capacity that reduces theoretical capacity by considering unavoidable operating interruptions like scheduled maintenance time and shutdowns for holidays

Answer 17

practical capacity

Answer 18

practical capacity

Question 19

• is the level of capacity utilization that satisfies average customer demand over a period that is long enough to consider seasonal, cyclical, and trend factors
• based on demand

Question 21

is the level of capacity utilization that managers expecct for the current budget period which is typically one year
- based on demand

Answer 21

master budget capacity utilization

Answer 22

master budget capacity utilization

Question 23

closeley related to