The Internal Revenue Service requires managers to use practical capacity for tax reporting because it is more stable over time and therefore less easy to manipulate.

Question

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Practical capacity is the maximum amount of output that can be produced over a longer period of time without requiring unsustainable overtime or adding additional resources. This measure is considered more stable and less prone to manipulation than current capacity or theoretical capacity, which can be influenced by short-term fluctuations in demand or production efficiency. Therefore, the IRS requires managers to use practical capacity for tax reporting purposes.

The Internal Revenue Service Requires Managers to Use Practical Capacity