Inventory Costing and Capacity Analysis

These flashcards cover key concepts and terms related to inventory costing and capacity analysis, essential for understanding the differences between various costing methods and their implications for financial reporting.

Variable Costing

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

Absorption Costing

A method of inventory costing in which all variable and fixed manufacturing costs are included as inventoriable costs.

Throughput Costing

A method of inventory costing in which only direct material costs are capitalized; all other costs are expensed.

Unfavorable Production-Volume Variance

The difference that arises when the number of units produced is less than the number of units expected to be produced.

Master-Budget Capacity Utilization

The level of capacity utilization that managers expect for the current budget period, typically one year.

Practical Capacity

The level of capacity that reduces theoretical capacity by considering unavoidable operating interruptions like maintenance and holiday shutdowns.

Normal Capacity Utilization

The level of capacity utilization that satisfies average customer demand over a period long enough to consider seasonal, cyclical, and trend factors.

Theoretical Capacity

The level of capacity based on producing at full efficiency all the time, without considering downtimes.

Denominator Level

The capacity level used to allocate budgeted fixed manufacturing costs to products which can greatly affect operating income.

Cost Allocation Base

The basis employed to allocate indirect costs to products, critical in determining budgeted fixed manufacturing costs.