Chapter 9: Income Effects of Denominator Level on Inventory Valuation

These flashcards cover key concepts of Chapter 9, focusing on fixed overhead allocation, inventory valuation, and the differences between absorption and variable costing.

What are the factors important to choosing the denominator level for calculating fixed overhead allocation rates?

Factors include theoretical capacity, practical capacity, normal capacity utilization, and master-budget capacity.

How does choosing the denominator level affect capacity management and performance evaluation?

It affects product costing, pricing decisions, inventory values, and the assessment of operational effectiveness.

What distinguishes absorption costing from variable costing?

Absorption costing includes fixed manufacturing costs in inventoriable costs while variable costing treats fixed costs as period expenses.

What is throughput costing?

Throughput costing includes only direct material costs in inventory and treats all other costs as expenses in the period incurred.

How does breakeven analysis differ under absorption and variable costing?

Breakeven under absorption costing includes fixed manufacturing costs absorbed into inventory, while variable costing solely considers variable costs and fixed costs are expensed.

What is theoretical capacity?

Theoretical capacity is the maximum possible output assuming no interruptions or delays in production.

What is practical capacity?

Practical capacity is the feasible output considering regular operational interruptions like maintenance or holidays.

What is normal capacity utilization?

Normal capacity utilization is based on satisfying average customer demand over a specific time period.

What is master-budget capacity?

Master-budget capacity is the level of output based on a single budget cycle or forecast for the period.

What impact does high operating leverage have on companies like Intel?

The higher the production output, the lower the fixed cost per unit, but there is a limit to production capacity without incurring additional costs.

How does the choice of denominator affect reported operating income?

It impacts both inventory values and cost of goods sold, which can alter operating income.

What problems arise if a company has too much capacity?

Excess capacity incurs idle costs and may lead to opportunities lost as competitors capture the market.

What is the role of fixed manufacturing costs in absorption costing?

They are included as part of the cost of goods sold and inventory, influencing reported income.

What is the risk of using absorption costing for performance evaluation?

It may incentivize managers to produce unnecessary inventory to inflate reported income.

What is a production-volume variance?

It reflects the difference between budgeted and actual output levels in terms of fixed manufacturing costs allocable to inventory.