8,000 units. Under the new method, the production would have to be
increased by 12,500 units. Again, this is a consequence of the difference
in predetermined overhead rates. The drop in sales has had a more
dramatic effect on net operating income under the new method as
noted above in part (3). In addition, since the predetermined overhead
rate is lower under the new method, producing excess inventories has
less of an effect per unit on net operating income than under the tradi-
tional method and hence more excess production is required.
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