For 2013, Milltown Iron Manufacturing has estimated its production capacities as follows:
Theoretical capacity .......... 400,000 units
Practical capacity ........... 300,000 units
Normal capacity .......... 260,000 units
Expected capacity ......... 200,000 units
Milltown is trying to choose which capacity measure it should use to develop its predetermined OH rates for 2013.
a. Why does the choice of capacity measure affect the amount of under-or overapplied overhead the firm will have at the end of 2013?
b. Which capacity measure choice would likely result in the least amount of under-or overapplied overhead?
c. Which of the alternative capacity measures makes allowances for possible cycles in the industry?