Matthew Yarian ACCT 515 Unit 3 9/17/2016 Chapter 4 4-15) Since many of the indirect cost occurred during a year are not known until the end of the year or accounting period companies use predetermined cost driver rates. In establishing predetermined cost driver rates one must choose a cost driver such as labor and/or machine hours for example. Using a predetermined cost driver gives a company a tool to help keep expenses in proportion with sales and production volumes which allows them to make important decisions about products. 4-18) For companies that use a cost plus pricing strategy computing the cost driver rate by using the planned level of the cost driver would lead to a death spiral. A death spiral occurs when demand for a certain product goes down, but the price of the product increases. By using the planned level of the cost driver, as expected demand for a product goes down the cost driver rate will increase causing an increase in price which would lead to less demand and ultimately the …show more content…
If a machine were to be nominally available for 150 hours a week, one would have to take into account downtime, setup, maintenance and other nonproductive factors to figure the estimated practical capacity which is typically 80% of the theoretical capacity so in this case our practical capacity for this machine is 120 hours. In computing practical capacity for labor one must take in to account factors such as lunch breaks, breaks, meetings, and other nonproductive time. For example, if an employee works 8 hours a day 5 days a week the theoretical capacity would be 40 hours a week. This said employee takes a 30 min lunch break every day, 15 min break every day, and has a 15 min production meeting at the beginning of every week. So the practical capacity for this employee would be 36 hours a week. Month Actual Machine Hours Monthly Overhead