When a Purchase Order Is Issued Under a Capital Projects

question 31

Multiple Choice

When a purchase order is issued under a Capital Projects fund,how should the transaction be recorded?

• A) Debit Encumbrances Control and credit Vouchers payable.
• B) Debit Encumbrances Control and credit Budgetary Fund Balance -- Reserve for Encumbrances.
• C) Debit Expenditures and credit Vouchers payable.
• D) Debit Expenditures and credit Budgetary Fund Balance -- Reserve for Encumbrances.

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Definitions:

Production Capacity

The maximum output a company can produce in a given period under normal circumstances.

Variable Manufacturing Costs

Costs that vary directly with the level of production output, including raw materials, direct labor, and variable overhead expenses.

Operating Income

Earnings before interest and taxes (EBIT), an indicator of a company’s profitability from its core business operations.

Fixed Overhead

Costs that do not change with the level of output, including rent, salaries, and insurance premiums.