11) Using ________ as the denominator level also gives the manager a more accurate idea of the resources
needed and used to produce a unit by excluding the cost of unused capacity.
A) practical capacity
B) normal capacity utilization
C) theoretical capacity
D) master-budget capacity utilization
12) The effect of spreading fixed manufacturing costs over a shrinking master-budget capacity utilization
amount results in ________.
A) greater utilization of capacity
B) increased unit costs
C) more competitive selling prices
D) greater demand for the product
13) The higher the denominator level, the ________.
A) higher the budgeted fixed manufacturing cost rate
B) lower the amount of fixed manufacturing costs allocated to each unit produced
C) higher the favorable production-volume variance
D) more likely actual output will exceed the denominator level
14) Operating income reported on the end-of-period financial statements is changed when ________ is
used to handle the production-volume variance at the end of the accounting period.
A) the adjusted allocation-rate approach
B) the proration approach
C) the write-off variances to cost of goods sold approach
D) the reinstatement approach
15) Which of the following approaches spreads underallocated or overallocated overhead among ending
balances in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold?
A) the adjusted allocation-rate approach
B) the proration approach
C) the write-off variances to cost of goods sold approach
D) the reinstatement approach
16) The Internal Revenue Service requires the use of ________ for calculating fixed manufacturing costs
per unit.
A) practical capacity
B) theoretical capacity
C) master-budget capacity utilization
D) normal capacity utilization
17) Use of practical capacity results in an unrealistically small fixed manufacturing cost per unit because
it is based on an idealistic and unattainable level of capacity.
18) Using practical capacity as the denominator level sets the cost of capacity at the cost of supplying the
capacity, regardless of the demand for the capacity.
19) When large differences exist between practical capacity and master-budget capacity utilization,
several companies classify the difference as production-volume variance.
20) Proration approach restates all amounts in the general and subsidiary ledgers by using actual rather
than budgeted cost rates.
21) Using practical capacity as the denominator level sets the cost of capacity at the cost of supplying the
capacity, regardless of the demand for the capacity.
22) For benchmarking purposes it is best to use master-budget capacity because all competitors use about
the same about of capacity for production.
23) Practical capacity rather than master-budget volume is a better way to price product and avoid
downward demand spiral.
24) Adjusted allocation-rate approach restates all amounts in the general and subsidiary ledgers by using
actual rather than budgeted cost rates.
25) Using practical capacity is best for evaluating the marketing manager’s performance for a particular
year.
26) U.S. tax reporting requires end-of-period reconciliation between actual and applied indirect costs
using the adjusted allocation-rate method or the proration method.
27) The higher the denominator level the higher the budgeted fixed manufacturing cost rate per unit.
28) Proration approach has no effect on year-end financial statements.
29) Usually there is no production-volume variance when normal capacity utilization is used as the
denominator level.
30) Rich Glasses manufactures glass bottles. January and February operations were identical in every way
except for the planned production.
January had a production denominator of 74,000 units.
February had a production denominator of 66,600 units.
Fixed manufacturing costs totaled $222,000.
Sales for both months totaled 62,000 units with variable manufacturing costs of $4 per unit. Selling and
administrative costs were $0.60 per unit variable and $51,000 of fixed. The selling price was $10 per unit.
Required:
Compute the operating income for both months using absorption costing.
31) Explain the three alternative approaches to dispose of the production-volume variance.
1) It is most difficult to estimate ________ because of the need to predict demand for the next few years.
A) practical capacity
B) theoretical capacity
C) master-budget capacity utilization
D) normal capacity utilization
2) Which of the following capacity levels do proponents of activity-based costing recommend to be used
as the denominator level to calculate activity cost rates?
A) practical capacity
B) normal capacity utilization
C) theoretical capacity
D) master-budget capacity utilization
3) Which of the following is true of unused capacity?
A) It is a definite sign of wasted resources.
B) It is intended for future use.
C) It is not possible to reduce or eliminate unused capacity costs.
D) It does not provide capacity for potential demand surges.
4) Which of the following is true of capacity costs?
A) Capacity costs are difficult to estimate.
B) Capacity costs don’t provide a useful planning tool for nonmanufacturing firms.
C) Capacity costs cannot be used with activity-based costing.
D) Capacity costs do not arise in the nonmanufacturing parts of the value chain.
5) Product-sustaining costs in activity-based costing are similar to ________.
A) mixed costs
B) variable costs
C) semi-variable costs
D) fixed costs
6) There is no output-level variance for variable costing, when ________.
A) the inventory level decreases during the period
B) the inventory level increases during the period
C) fixed manufacturing overhead is allocated to work in process
D) fixed manufacturing overhead is not allocated to work in process
7) When actual production is below practical capacity, there will be unused-capacity cost only in the
manufacturing function and not in nonmanufacturing parts like distribution function.
8) Managers cannot use human resource consideration to obtain a reliable estimate of the denominator
level for the budget period as they cannot be quantified.
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9) Companies can more reliably estimate master-budget capacity utilization than normal capacity
utilization.
10) Explain how using master-budget capacity utilization for setting prices can lead to a downward
demand spiral.
11) Should a company with high fixed costs and unused capacity raise selling prices to try to fully recoup
its costs?
12) How does the capacity level chosen to compute the budgeted fixed overhead cost rate affect the
production-volume variance?
13) Discuss the three methods to dispose of production volume variance.
Objective 9.A
Answer the following questions using the information below:
Ms. Janice Meyers, the company president, has heard that there are multiple breakeven points for every
product. She does not believe this and has asked you to provide the evidence of such a possibility. Some
information about the company for 2011 is as follows:
Total fixed manufacturing overhead $180,000
Total other fixed expenses $200,000
Total variable manufacturing expenses $240,000
Total other variable expenses $240,000
Units produced 60,000 units
Budgeted production 60,000 units
Units sold 50,000 units
Selling price $40
1) What are breakeven sales in units using variable costing?
A) 5,625 units
B) 5,769 units
C) 11,875 units
D) 12,180 units
2) What are breakeven sales in units using absorption costing?
A) 5,625 units
B) 6,667 units
C) 6,897 units
D) 8,000 units
3) What are breakeven sales in units using absorption costing if the production units are actually 25,000?
A) 5,625 units
B) 6,667 units
C) 7,667 units
D) 7,931 units
Answer the following questions using the information below:
Mariposa Corporation sells “Bigger”, its only product. The following information is available for the
current month:
Selling price per unit $100
Standard fixed manufacturing costs per unit $50
Variable selling and administrative costs per unit $8
Standard variable manufacturing costs per unit $2
Fixed selling and administrative costs $40,000
Units produced 10,000 units
Units sold 9,600 units
4) What is the variable costing breakeven point in units?
A) 833 units
B) 5,556 units
C) 5,838 units
D) 6,000 units
5) What is the absorption costing breakeven point in units?
A) 917 units
B) 1,000 units
C) 5,838 units
D) 6,000 units
Answer the following questions using the information below:
Greene Manufacturing incurred the following expenses during 2015:
Fixed manufacturing costs $112,500
Fixed nonmanufacturing costs $87,500
Unit selling price $250
Total unit cost $100
Variable manufacturing cost rate $50
Units produced 1,340 units
6) What will be the breakeven point if variable costing is used?
A) 1,334 units
B) 1,125 units
C) 1,000 units
D) 563 units
7) What will be the breakeven point in units if absorption costing is used?
A) 1,330 units
B) 1,000 units
C) 887 units
D) 563 units
8) What is the breakeven point in units using absorption costing if the units produced are actually 2,250?
A) 1,330 units
B) 1,000 units
C) 887 units
D) 584 units
9) Jeff Corporation is having trouble selling its inventory because of its ongoing dispute with its logistical
partner. The company was not able to sell any inventory in the month of January because of the dispute.
It manufactured 8,000 units in January. Jeff had no other fixed costs commitment other than fixed
manufacturing costs of $100,000. It follows absorption costing. If actual production in January was equal
to the denominator level, what is the amount of sales required to attain breakeven point?
A) 1250 units
B) 125 units
C) 10 units
D) 0 units
10) Bosely Corporation is in the business of selling computers. The following expenses were incurred in
March 2011:
Fixed manufacturing costs $75,000
Fixed nonmanufacturing costs $35,000
Unit selling price $1,200
Variable manufacturing cost $700
Units produced 1,500
What will be the breakeven point if variable costing is used?
A) 150 units
B) 220 units
C) 157 units
D) 92 units
11) The breakeven points are the same under both variable costing and absorption costing.
12) Sutton Hot Dog Stand sells hot dogs for $1.35. Variable costs are $1.05 per unit with fixed production
costs of $90,000 per month at a level of 400,000 units. Fixed administrative costs total $30,000. Sales
average 400,000 units per month, with planned production of 400,000 hot dogs.
Required:
a. What are breakeven unit sales under variable costing?
b. What are breakeven unit sales under absorption costing if she sells everything she prepares?
c. What are breakeven unit sales under absorption costing if average sales are 498,000 and planned
production is changed to 500,000?