Chapter 9 lecture Inventory costing and capacity analysis

Question 1

the two most common methods of costing inventory in manufacturing companies

Answer 1

1. variable costing
2. absorption costing

Question 2

the choice of variable vs absorption costing determines what

Answer 2

which manufacturing costs are treated as inventoriable costs

Question 3

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 3

absorption cost

Question 4

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

Answer 4

variable costs

Question 5

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

Answer 5

throughput costing

Question 6

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

Answer 6

absorption costing

Question 7

absorption costing

Answer 7

• 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 the income they report to shareholders

Question 8

an important attribute of ______ costing is that it enables a manager to increase margins and operating income by producing more ending inventory

Answer 8

absorption

Question 9

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

Answer 9

build up an undesirable level of inventories

Question 10

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

Answer 10

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 used to evaluate performance
5. include nonfinancial as qwll as financial variables in the measures to evaluate performance

Question 11

spending on fixed manufacturing costs enables firms to do what ?

Answer 11

obtain the scale of capacity needed to satisfy the exepected market demand from customers

Question 12

______ is one of the most stragetic and most difficult decicsions managers face

Answer 12

determining the right amount of spending or the appropriate level of capacity

Question 13

______ will rise and fall with production

Answer 13

total variable costs

Question 14

too much capacity means

Answer 14

firms will incur the cost of unused capacity

Question 15

too little capacity means

Answer 15

that demand from some customers may be unfulfilled

Question 16

the choice of capacity level used to allocate budgeted fixed manufacturing costs to produce can greatly affect

Answer 16

pro forma operating income

Question 17

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

Answer 17

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

Question 18

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

Answer 18

theoretical capacity

Question 19

commentary - this things levels, in the real world, are unattainable but they represent the ideal goal of capacity utilization a company can aspire to

Answer 19

theoretical capacity

Question 20

• is the level of capacity that reduces theoretical capacity by considering unavoidable operating interruptions like scheduled maintenance time and shutdowns for holidays
  factor - based on supply/inputs

Answer 20

practical capacity

Question 21

some of the considerations taken into acount for _______ capacity are more predictable than others. plant shutdowns are typically scheduled a year or more in advance; sickness or other interruptions can only be estimated based on past results

Answer 21

practical capacity

Question 22

• 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
  factors - based on demand

Answer 22

normal capacity utilization

Question 23

closely related to master budget capacity, but relies almost entirely on past results as a representation of typical/normal demand levels

Answer 23

normal capacity utilization

Question 24

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

Answer 24

master budget capacity utilization

Question 25

closely reltaed to normal capacity, but relies more on expectations/predictions in the near term as opposed to an average of previous levels of demand

Answer 25

master budget capacity utilization

Question 26

the choice of denominator level capacity to use may differ based on the purpose for which the choice is being made. 5 of these purposes include

Answer 26

1. product costing and capacity management 2. pricing 3. performance evaluation 4. external reporting 5. tax requirements

Question 27

using _______ like practical capacity as the denominator sets the cost of capacity (which is the fixed cost in the numerator) at the cost of supplying the capacity, regardless of production/unit volume 1. product costing and capacity management

Answer 27

supply based capacity - benefit: highlights the cost of capacity acquired but not used

Question 28

in contrast to supply based capacity, ________ hides the amount unsused capacity because is allocated all of the cost of supplyint the capacity to the amount of production/unit volume, regardless of how much capacity it really takes 1. product costing and capacity management

Answer 28

demand based capacity - problem: management doesnt get alerted when there is unused capacity

Question 29

production decisions made on demand based capacity can lead to the continuing reduction in the demand for products that occurs when competitor prices are not met; as demand drops further, higher and higher unit costs result because fixed costs are spread over dewer units

Answer 29

downward demand spiral

Question 30

when there are large differences between supply of capacity and the demand for capacity, the difference should be classified as

Answer 30

planned unused capacity