a- \" The Difference bwteeen practical capacity and master- budget capacity util

Question

a- " The Difference bwteeen practical capacity and master- budget capacity utilization is the best measure of management's ability to balance the costs of having too much capacity and having too little capacity." Do you agree? Explain

b- "To ensure unbiased cost allocations, fixed costs should br allocated on the basis of estimated long-run use by user-department managers." Do you agree?Why?

c- Describe how companies are increasingly facing revenue-allocation decisions. Distinguish between the stand-alone and the incremental revenue-allocation methods. Identify and discuss arguments that individual product managers may put forward to support their preferred revenue-allocation method.

Explanation / Answer

Ans-1)Practical capacity: Practical capacity is the highest level which a factory or machine can produce with an acceptable degree of efficiency and considering unavoidable loss of

productive working time due to holidays, machine repair etc.

Master-budget capacity utilization: master budget capacity utilisation means use the capacity
of the factory or machine according to the budgeted sales and production. The anticipated level of capacity utilization for the upcoming year or the other planning period.(such as six months).

Ans-2)Disagree,While the allocation wont affects the firm's profit as a whole,if the allocation is not done properly,it can make some departments and projects(and their managers)look better or worse than they should profit-wise. As the following articles shows ,the method of allocating costs for a project affects not just the firms but also the consumer.Based on the method used ,consumer may spend more or less,for the same service.

Ans-3)A big benefit for a dual rate method is that its signals to division mangers how variable cost and fixad cost behave differently.This information guides division managers to make decisions that benefit the organisation as a whole,as well as each decisions.

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