For internal reporting purposes, it is recommended that fixed overhead allocation rates in a standard costing system be based on which of the following denominator volume choices?
A) Budgeted capacity usage since this is the most likely output level.
B) Theoretical capacity since this is the level required under generally accepted accounting principles.
C) Actual capacity utilization.
D) Expected capacity usage.
E) Practical capacity.

Question

Quizplus · Accepted Answer

Practical capacity is the most appropriate denominator volume choice as it represents the maximum production capacity realistically achievable, taking into account normal slowdowns or interruptions. Budgeted, theoretical or expected capacity may be unrealistic or overly optimistic, while actual capacity utilization may be affected by inefficiencies or extraordinary events. Therefore, practical capacity provides a more reliable basis for estimating fixed overhead costs and establishing allocation rates in a standard costing system.

For Internal Reporting Purposes, It Is Recommended That Fixed Overhead