The Percent of Sales Method Relies on the Idea That

question 22

Multiple Choice

The percent of sales method relies on the idea that capacity increases are ________, even though in practice such increases are ________.

• A) incremental, lumpy
• B) incremental, incremental
• C) lumpy, incremental
• D) lumpy, lumpy

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Definitions:

Variable Expense

Expenses that change in proportion to the activity of a business.

Fixed Expense

Costs that do not vary with the level of production or sales, such as rent or salaries.

Variable Overhead Rate

The rate at which variable overhead costs are allocated to products based on an activity base, such as machine-hours or direct labor-hours, reflecting changes in cost with production volume.

Fixed Manufacturing Overhead

Costs related to the production process that remain constant regardless of the production volume, such as rent and salaries of managers.