question archive 1) What is the IRS's requirements for tax reporting regarding the choice of a denominator-level capacity concept? 2) "The difference between 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
1) What is the IRS's requirements for tax reporting regarding the choice of a denominator-level capacity concept? 2) "The difference between 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
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1) What is the IRS's requirements for tax reporting regarding the choice of a denominator-level capacity concept?
2) "The difference between 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.
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Answer:
1.
For tax reporting in the United States, the IRS requires only that indirect production costs are "fairly" apportioned among all items produced
Overhead rates based on normal or master-budget capacity utilization, as well as the practical capacity concept, are permitted
At year-end, pro-ration of any variances between inventories and cost of goods sold is required (unless the variance is immaterial in amount)
2.
No--the costs of having too much capacity/too little capacity involve revenue opportunities potentially forgone as well as costs of money tied up in plant assets.
