"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:

Vitreous Humor

the clear gel that fills the space between the lens and the retina of the eyeball, providing it with shape and optical properties.

Bipolar Cells

A type of neuron found in the retina, acting as intermediaries between photoreceptor cells and ganglion cells, participating in the processing of visual information.

Optic Nerve

is a paired nerve that transmits visual information from the retina to the brain.

Retina

The innermost, light-sensitive layer of tissue of the eye of most vertebrates and some mollusks, processing visual information.