Q: A company’s actual production for the month is 600,000 units, but its master-budget capacity utilization is 800,000 units. Fixed manufacturing overhead is $120,000. What is the production-volume variance? (Express your answer in LaTeX format.)

$120,000 \times \left(1 - \frac{600,000}{800,000}\right) = $30,000$

Question 1

Which of the following best describes 'theoretical capacity' in the context of manufacturing?

Accepted Answer

The maximum output possible without any delays or interruptions, assuming continuous production (24/7/365).

Question 2

A company has fixed manufacturing costs of $60,000 per month. If it chooses a denominator level of 1,000,000 units (theoretical capacity), what is the fixed overhead rate per unit? (Express your answer in LaTeX format.)

Accepted Answer

$60,000 \div 1,000,000 = 0.06$

Question 3

Which denominator level is most likely to result in the highest fixed manufacturing overhead rate per unit?

Accepted Answer

Master-budget capacity utilization

Question 4

A company produces 400,000 units in a month, but its practical capacity is 800,000 units. Fixed manufacturing costs are $50,000. What is the fixed overhead rate per unit using practical capacity? (Express your answer in LaTeX format.)

Accepted Answer

$50,000 \div 800,000 = 0.0625$

Question 5

Which of the following statements about absorption costing is TRUE?

Accepted Answer

Absorption costing includes both variable and fixed manufacturing costs in inventory values.

Question 6

If a company uses master-budget capacity utilization as its denominator level, which of the following is a likely consequence during a period of declining sales?

Accepted Answer

The fixed overhead rate per unit will increase, potentially causing a downward demand spiral.

Question 7

A company’s actual production for the month is 600,000 units, but its master-budget capacity utilization is 800,000 units. Fixed manufacturing overhead is $120,000. What is the production-volume variance? (Express your answer in LaTeX format.)

Accepted Answer

$120,000 	imes \left(1 - \frac{600,000}{800,000}ight) = $30,000$

Question 8

Which capacity measure is required for financial reporting under ASPE and IFRS?

Accepted Answer

Normal capacity utilization

Question 9

Under variable costing, how are fixed manufacturing overhead costs treated?

Accepted Answer

They are expensed in the period incurred.

Question 10

A company’s sales price per unit is $10, variable manufacturing cost per unit is $4, and variable marketing cost per unit is $1. What is the contribution margin per unit? (Express your answer in LaTeX format.)

Accepted Answer

$10 - (4 + 1) = 5$

Question 11

Which of the following is a potential risk of using absorption costing for performance evaluation?

Accepted Answer

Managers may be incentivized to overproduce to increase reported operating income.

Question 12

If a company wants to highlight the cost of unused capacity and encourage managers to manage it, which denominator level should it use?

Accepted Answer

Practical capacity

Question 13

Which costing method includes only direct material costs in inventory and treats all other costs as period expenses?

Accepted Answer

Throughput costing

Question 14

A company’s fixed manufacturing costs are $90,000 per month. If it uses normal capacity utilization of 600,000 units, what is the fixed overhead rate per unit? (Express your answer in LaTeX format.)

Accepted Answer

$90,000 \div 600,000 = 0.15$

Question 15

Which of the following is NOT a reason for choosing practical capacity as the denominator level?

Accepted Answer

It is required for external financial reporting under ASPE/IFRS.

Question 16

A company’s actual production matches its master-budget capacity utilization. What is the production-volume variance?

Accepted Answer

Zero

Question 17

Which denominator level is most appropriate for evaluating a marketing manager’s performance in the current year?

Accepted Answer

Master-budget capacity utilization

Question 18

If a company’s fixed manufacturing costs remain constant but the denominator level decreases due to lower demand, what happens to the fixed overhead rate per unit?

Accepted Answer

It increases.

Question 19

Which of the following best explains the 'downward demand spiral' in the context of capacity management?

Accepted Answer

A cycle where decreasing capacity utilization leads to higher fixed overhead rates per unit, causing higher prices and further reductions in demand.

Question 20

A company’s sales price per unit is $20, variable manufacturing cost per unit is $8, and total fixed costs are $120,000. What is the break-even quantity of sales? (Express your answer in LaTeX format.)

Accepted Answer

$\frac{120,000}{20 - 8} = 10,000$

Capacity-Level Choices and Costing Methods in Financial Accounting

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