"Firms Need to Use the Capacity of the Equipment or Division

question 161

Essay

"Firms need to use the capacity of the equipment or division that is the 'bottleneck' of the manufacturing process as the denominator volume in setting the fixed overhead allocation rate. In cases where there is more than one 'bottleneck,' the denominator should be the smallest capacity among the bottleneck production processes."

Required:
1. What type of variance is related to this "denominator?" Explain.
2. Define the terms theoretical capacity, practical capacity, and budgeted capacity utilization. Of the three, which is considered most relevant for setting the predetermined overhead application rate for internal reporting purposes, particularly for fixed overhead costs? Explain.

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Definitions:

Opium of the People

A term coined by Karl Marx, referring to religion as something that provides comfort to the oppressed masses with an illusion of happiness, pacifying them and detracting from actual worldly sufferings.

Transcendent

Going beyond the limits of ordinary experience, this term refers to something that is above and beyond the material universe.

Immanent

Existing or operating within; inherent.

Concepts of God

Various notions and ideas around the divine or supreme being, encompassing attributes like omnipotence, omniscience, and benevolence.