4) Throughput contribution equals ________.
A) variable costs minus fixed costs
B) revenues minus all direct labor costs
C) revenues minus all direct material cost of goods sold
D) revenues minus manufacturing overhead
5) If 1,000 units are produced and only 700 units are sold, ________ results in the greatest amount of
expense reported on the income statement.
A) throughput costing
B) variable costing
C) absorption costing
D) period costing
6) If 800 units are produced and 1,200 units are sold, the costing method which will result in the greatest
operating income is ________.
A) throughput costing
B) variable costing
C) absorption costing
D) period costing
7) Advocates of throughput costing maintain that ________.
A) both variable and fixed are necessary to produce goods; therefore, both types of costs should be
inventoried
B) all manufacturing costs plus some design costs should be inventoried
C) fixed manufacturing costs are related to the capacity to produce rather than to the actual production of
specific units
D) except direct labor no other costs are truly variable in output
Tall Statues Inc., produces wood statues. Management has provided the following information:
Actual sales 30,000 statues
Budgeted production 50,000 statues
Selling price $46.00 per statue
Direct material costs $6.90 per statue
Variable manufacturing costs $3.45 per statue
Variable administrative costs $5.75 per statue
Fixed manufacturing overhead $4.60 per statue
8) What is the cost per statue if throughput costing is used?
A) $20.70
B) $16.10
C) $10.35
D) $6.90
9) What is the total throughput contribution?
A) $1,069,500
B) $897,000
C) $1,173,000
D) $759,000
Answer the following questions using the information below:
Daniel Rubber Company produces a specialty item. Management has provided the following
information:
Actual sales 110,000 units
Budgeted production 100,000 units
Selling price $40.00 per unit
Direct material costs $8.00 per unit
Variable manufacturing overhead $3.00 per unit
Variable administrative costs $5.00 per unit
Fixed manufacturing overhead $4.00 per unit
10) What is the cost per statue if throughput costing is used?
A) $20.00
B) $17.00
C) $13.00
D) $8.00
11) What is the total throughput contribution?
A) $2,640,000
B) $3,190,000
C) $3,520,000
D) $4,070,000
12) Which of the following inventory costing methods results in the least amount of costs being
inventoried?
A) absorption costing
B) variable costing
C) throughput costing
D) direct costing
13) Which of the following inventory costing methods shown below is most likely to cause undesirable
incentives for managers to build up finished goods inventory?
A) absorption costing
B) variable costing
C) throughput costing
D) direct costing
14) Throughput costing considers only direct materials and direct manufacturing labor to be truly
variable costs.
15) Absorption costing is also referred to as super-variable costing.
16) When production quantity exceeds sales, throughput costing results in reporting lower operating
income than variable costing.
17) Throughput costing provides less incentive to produce for inventory than either variable costing or,
especially, absorption costing.
18) A company may use absorption costing for external reporting and still choose to use throughput
costing for internal reports.
19) Throughput margin equals revenues minus all product costs.
20) Throughput costing results in a higher amount of manufacturing costs being placed in inventory than
either variable or absorption costing.
21) World Statues produces a specialty statue item. The following information has been provided by
management:
Actual sales 10,000 units
Budgeted production 12,000 units
Selling price $425 per unit
Direct material costs $87.50 per unit
Fixed manufacturing costs $62.50 per unit
Variable manufacturing costs $50.00 per unit
Variable administrative costs $25.00 per unit
Required:
a. What is the cost per statue if absorption costing is used?
b. What is the cost per statue if “super-variable costing” is used?
c. What is the total throughput contribution?
22) What is throughput costing? What advantages is it purported to have over variable and absorption
costing?
1) Practical capacity is the denominator-level concept that ________.
A) reduces theoretical capacity for unavoidable operating interruptions
B) is the maximum level of operations at maximum efficiency
C) is based on the level of capacity utilization that satisfies average customer demand over periods
generally longer than one year
D) is based on anticipated levels of capacity utilization for the coming budget period
2) ________ reduces theoretical capacity for unavoidable operating interruptions.
A) Practical capacity
B) Theoretical capacity
C) Master-budget capacity utilization
D) Normal capacity utilization
3) ________ is based on the level of capacity utilization that satisfies average customer demand over
periods generally longer than one year.
A) Practical capacity
B) Theoretical capacity
C) Master-budget capacity utilization
D) Normal capacity utilization
4) ________ is the level of capacity utilization that managers expect for the current budget period, which
is typically one year.
A) Practical capacity
B) Master-budget capacity utilization
C) Theoretical capacity
D) Normal capacity utilization
5) ________ is the level of capacity based on producing at full efficiency all the time.
A) Practical capacity
B) Theoretical capacity
C) Normal capacity
D) Demand capacity
6) Which of the following measures capacity levels in terms of demand for the output of the plant?
A) practical capacity and theoretical capacity
B) theoretical capacity and normal capacity utilization
C) normal capacity utilization and master-budget capacity utilization
D) master-budget capacity utilization and practical capacity
7) Which of the following best describes practical capacity?
A) It is the level of capacity that reduces theoretical capacity by considering unavoidable operating
interruptions, such as scheduled maintenance time and shutdowns for holidays.
B) It is the level of capacity based on producing at full efficiency all the time.
C) It is the level of capacity utilization that satisfies average customer demand over a period that includes
seasonal, cyclical, and trend factors.
D) It is the level of capacity utilization that managers expect for the current budget period, which is
typically one year.
8) The budgeted fixed manufacturing cost rate is the lowest for ________.
A) practical capacity
B) theoretical capacity
C) master-budget capacity utilization
D) normal capacity utilization
9) ________ provides the lowest estimate of denominator-level capacity in case demand of the product is
not a limiting factor.
A) Practical capacity
B) Theoretical capacity
C) Master-budget capacity utilization
D) Normal capacity utilization
Answer the following questions using the information below:
Henry Inc., a manufacturing firm, is able to produce 1,000 pairs of sneakers per hour, at maximum
efficiency. There are three eight-hour shifts each day. Due to unavoidable operating interruptions,
production averages 800 units per hour. The plant actually operates only 27 days per month. Based on the
current budget, Henry estimates that it will be able to sell only 500,000 units due to the entry of a
competitor with aggressive marketing capabilities. But the demand is unlikely to be affected in future and
will be around 515,000. Assume the month has 30 days.
10) What is the master-budget capacity utilization level for this budget period?
A) 500,000 units
B) 515,000 units
C) 518,400 units
D) 720,000 units
11) What is the theoretical capacity for the month?
A) 1,000,000 units
B) 720,000 units
C) 518,800 units
D) 240,000 units
12) What is the practical capacity for the month?
A) 1,000,000 units
B) 720,000 units
C) 518,400 units
D) 240,000 units
13) Determining the “right” level of capacity is one of the most strategic and difficult decisions managers
face.
14) Both theoretical capacity and practical capacity measure capacity levels in terms of demand for the
output of the plant.
15) If the variable manufacturing overhead is $50 per unit for a company, the lowest budgeted
manufacturing cost per unit can be obtained by using normal capacity utilization as the denominator
level capacity.
16) The choice of the capacity level used to allocate budgeted fixed manufacturing costs to products can
greatly affect the product-cost information available to managers.
17) Engineering and human resource factors are both important when estimating theoretical or practical
capacity.
18) Practical capacity is the level of capacity that reduces theoretical capacity by considering unavoidable
operating interruptions, such as scheduled maintenance time and shutdowns for holidays.
19) Practical capacity can never exceed theoretical capacity.
20) Practical capacity is unattainable in the real world.
21) A company should use the same denominator level capacity for all the budgets and other purposes so
as to facilitate comparability and avoid misrepresentation.
22) Match each of the following items with one or more of the denominator-level capacity concepts by
putting the appropriate letter(s) by each item:
a. Theoretical capacity
b. Practical capacity
c. Normal capacity utilization
d. Master-budget capacity utilization
1. Reduces theoretical capacity by considering unavoidable operating interruptions
2. Producing at full efficiency all the time
3. Measures capacity levels in terms of demand
4. Level of capacity utilization that satisfies average customer demand over a period
5. Does not allow for plant maintenance
6. Engineering and human resource factors are important when estimating capacity
7. Level of capacity utilization that managers expect for the current budget period
8. Ideal goal of capacity utilization
9. Takes into account seasonal, cyclical, and trend factors
10. Measures capacity levels in terms of what a plant can supply
23) Soul Socket Inc. manufactures socket wrenches.
• For next month, the vice president of production plans on producing 4,450 wrenches per day.
• The company can produce as many as 5,000 wrenches per day, but is more likely to produce 4,500 per
day.
• The demand for wrenches for the next three years is expected to average 4,250 wrenches per day.
• Fixed manufacturing costs per month total $374,000.
• The company works 22 days a month.
• Fixed manufacturing overhead is charged on a per-wrench basis.
Required:
a. What is the theoretical fixed manufacturing overhead rate per wrench for the next month?
b. What is the practical fixed manufacturing overhead rate per wrench for the next month?
c. What is the normal fixed manufacturing overhead rate per wrench for the next month?
d. What is the master-budget fixed manufacturing overhead rate per wrench for the next month?
Objective 9.6
1) Which of the following is true of theoretical capacity?
A) It will be less than the real capacity available to a company.
B) It provides the best perspective of actual long-run costs.
C) It results in the lowest cost estimate of the four capacity options when used for product costing.
D) It replicates the cost of capacity in a competitor’s cost structure.
2) The use of theoretical capacity results in an unrealistically low fixed manufacturing cost per unit
because it is based on ________.
A) real available capacity
B) an unattainable level of capacity
C) normal capacity utilization
D) normal costing
3) Budgeted fixed manufacturing costs of a product using practical capacity ________.
A) represents the cost per unit of supplying capacity
B) can result in setting selling prices that are not competitive
C) includes the cost of unused capacity
D) should be used to evaluate a marketing manager’s performance in the current year
4) Which of the following is true of normal capacity utilization?
A) It will be less than the real capacity available to a company.
B) It can result in setting selling prices that are not competitive.
C) It results in the lowest cost estimate of the four capacity options when used for product costing.
D) It represents the maximum units of production intended for current capacity.
5) Which of the following is true of master-budget capacity utilization?
A) It hides the amount of unused capacity.
B) It represents the maximum units of production intended for current capacity.
C) It provides the best cost estimate for benchmarking purposes.
D) It is an average that provides no meaningful feedback to a firm’s marketing manager for a particular
year.
6) Which of the following capacity levels should a company choose, from a long-run product costing
perspective, to allocate budgeted fixed manufacturing costs to products?
A) master-budget capacity utilization to highlight unused capacity
B) normal capacity utilization for benchmarking purposes
C) practical capacity for pricing decisions
D) theoretical capacity for performance evaluation
7) Customers expect to pay a price that includes ________.
A) the cost of unused capacity
B) only the cost of actual capacity used
C) variable costs but not capacity costs
D) both actual and unused capacity costs
8) The marketing manager’s performance evaluation is most fair when based on a denominator level
using ________.
A) practical capacity
B) theoretical capacity
C) master-budget capacity utilization
D) normal capacity utilization
9) ________ is the continuing reduction in the demand for a company’s products that occurs when
competitor prices are not met.
A) Downward demand spiral
B) Competitor pricing pressure
C) Continuous step down demand
D) Super-variable costing
10) Using master-budget capacity to set selling prices ________.
A) avoids the recalculation of unit costs when expected demand levels change
B) spreads fixed costs over available capacity
C) can result in a downward demand spiral
D) uses the perspective of long-run product pricing