Which of the following is an advantage of using practical capacity to allocate costs?

The advantage of using practical capacity to allocate costs is that it focuses management’sattention on managing unused capacity. Using practical capacity also avoids burdening the userdivisions with the cost of unused capacity of the central computer department. In contrast, whencosts are allocated on the basis of the demand for computer services, all $3,000,000 of budgetedfixed costs, including the cost of unused capacity, are allocated to user divisions. If costs are usedas a basis for pricing, then charging user divisions for unused capacity could result in thedownward demand spiralSingle – Rate versus Dual – Rate MethodThere are benefits and costs of both the single – rate and dual – rate methods. One benefit of thesingle-rate method is the low cost to implement it. The single – rate method avoids the often –expensive analysis necessary to classify the individual cost items of a department into fixed andvariable categories. Also, by conditioning the final allocations on the actual usage of centralfacilities, rather than basing them solely on uncertain forecasts of expected demand, it offers theuser divisions some operational control over the charges they bear.A problem with the single – rate method is that it makes the allocated fixed costs of the supportdepartment appear as variable costs to the operating divisions. Consequently, the single – ratemethod may lead division managers to make outsourcing decisions that are in their own bestinterest but that may be inefficient from the standpoint of the organization as a whole. Considerthe setting where allocations are made on the basis of the demand for computer services. In thiscase, each user division is charged $450 per hour under the single – rate method (recall that $250of this charge relates to the allocated fixed costs of the central computer department). Suppose anexternal vendor offers the microcomputer division computer services at a rate of $340 per hour,at a time when the central computer department has unused capacity. The microcomputerdivision’s managers would be tempted to use this vendor because it would lower the division’scosts ($340 per hour instead of the $450 per hour internal charge for computer services). In theshort run, however, the fixed costs of the central computer department remain unchanged in therelevant range (between 6,000 hours of usage and the practical capacity of 18,750 hours). SHCwill therefore incur an additional cost of $140 per hour if the managers were to take this offer –the difference between the $340 external purchase price and the true internal variable cost of$200 of using the central computer department.

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Answer:

The correct option is Option B.

Explanation:

In cost accounting, "practical capacity" refers to the maximum amount of capacity that can be controlled while taking into account delays that cannot be avoided. Production crew vacations and the requirement for equipment maintenance and repairs are two potential reasons for unavoidable delays. After accounting for those types of production disruptions, the company can assess its practical capacity.

In terms of actual capacity, the production level is viewed from the supply side rather than the demand side.

What if the section was entirely occupied? What would the output look like at that level? The firm can pose these queries to itself when figuring out cost allocation rates using practical capacity.

Consequently, the practical approach can enable management.

As a result, the practical approach can enable management to concentrate on the underused capacity, which is a significant benefit when utilizing practical capacity to assign expenditures.

Explanation for incorrect options:

a. The expense of idle capacity is being prioritized rather than the cost of overused capacity.

c. The practical approach does result in an uneven distribution of overheads.

d. By concentrating on the idle capacity, management will spare the user division the expense of unused capacity.

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