Chapter 9 Inventory Costing and Capacity Analysis (ON FINAL EXAM)

Inventory-Costing

The two most common methods of costing inventory in manufacturing companies are?

VARIABLE costing and ABSORPTION costing

**choice determines which manufacturing costs are treated as inventoriable costs

Variable costing

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

Absorption costing

is a method of inventory costing in which all variable and fixed manufacturing costs are included as inventoriable costs. You can say that inventory "absorbs" all manufacturing costs.

Throughput costing

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

Inventory Costing: Differences in Income

1.Operating income will differ between absorption and variable costing IF inventory levels change because of the difference in accounting for fixed manufacturing costs.

2.The amount of the difference represents the amount of fixed manufacturing costs capitalized as inventory under absorption costing and expensed as a period cost under variable costing

Absorption costing is preferred for several reasons what are the reasons?

•It is cost-effective and less confusing.

•It can help prevent managers from taking actions that make their performance measure look good but that hurt the income they report to shareholders.

•It measures the cost of all manufacturing resources (variable or fixed) necessary to produce inventory

Throughput margin equals

revenues minus all direct material cost of goods sold

Too much capacity means firms will incur?

will incur the cost of unused capacity; having too little means that demand from some customers may be unfulfilled

In business and accounting, capacity ordinarily means?

"constraint" or an "upper limit."

What are the four different capacity levels that can be used as the denominator to compute the budgeted fixed manufacturing cost rate?

1.Theoretical capacity

2.Practical capacity

3.Normal capacity utilization

4.Master-budget capacity utilization

Theoretical capacity

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

•theoretical in the sense that it does not allow for any slowdowns due to plant maintenance, shutdown periods, or interruptions because of downtime on the assembly lines

•theoretical capacity levels, in the real world, are unattainable, but they represent the ideal goal of capacity utilization a company can aspire to

Practical capacity

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

Both theoretical capacity and practical capacity measure?

capacity levels in terms of what a plant can supply

Normal capacity

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

Master-budget capacity

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

Choosing a Capacity Level

The choice of denominator-level capacity to use may differ based on the purpose for which the choice is being made.

Some of those purposes include the following?

1.Product costing and capacity management

2.Pricing

3.Performance evaluation

4.External reporting

5.Tax requirements

Give examples of theoretical capacity.

Match examples with correct denominator capacity.

-measures the denominator level in terms of what a plant can supply

-is based on producing at full efficiency all the time

-represents an ideal benchmark

-highlights the cost of capacity acquired but not used

-if used as the denominator level concept would avoid the restatement of unit costs when expected demand level change

theoretical capacity

Give examples of master budget capacity.

Match examples with correct denominator capacity.

-represents the expected level of capacity utilization for the next budget period

-measures the denominator level in terms of demand for the output of the plant

-should be used for performance evaluation in the current year

-hides the cost of capacity acquired but not used

master budget capacity

Give examples of practical capacity.

Match examples with correct denominator capacity.

-measures the denominator level in terms of what a plant can supply

-highlights the cost of capacity acquired but not used

-should be used for long term pricing purposes

-if used as the denominator level concept would avoid the restatement of unit costs when expected demand level change

practical capacity

Give examples of normal capacity .

Match examples with correct denominator capacity.

-measures the denominator level in terms of demand for the output of the plant

-takes into account seasonal, cyclical, and trend factors

-hides the cost of capacity acquired but not used

normal capacity