Question

It is stated in chapter 5 of Cornerstones of Cost Management that the theoretical and practical activity levels reflect, in general, the company's production capabilities, while the expected and normal activity levels reflect, in general, consumer demand. Please explain why these breakdowns are correct, including possible examples of what is being described by each of the activity levels.

Answer 1

Answer:-

Step:1- Theoretical and practical activity levels reflect, in general, the company's production capabilities as discussed below:-

As per theory discussed we can say that when inventory managers check the capacity of production on paper thats activity reflect our company maximum production capabilities because when we check on paper we apply all standards of cost accounting and estimate our company maimum production capabilities, so we can able to check that upto what quantity we can accept order for productions.

For Example:- A car manufacture want to accept an order that requires 100 cars with in a month before accepting such order a car manufacture check his production assets on papers like Man, Money, Material, Machine etc that all such assets are capable to produce an order with in a limit hence theoritical & practical help us to reflect company production capabilities.

Step:2- Expected and normal activity levels reflect, in general, consumer demand as discussed below:-

As per theory we can say that Expected and normal activity levels reflect customer as it is better to say that customer think about our or company production capability and they will decide to give order or not lets understand with example.

For Example:- Suppose a boss of company want to distribute tablets to their employees & staff on occassion of anniversary of 50 years of completion of company and such occasion is in next 7 days. And want to give order of 1000 tablets hence the boss will look out for such company which give better tablets in less expenditure and within time limits therefore he will look for such company who had already handled such order or hav a capability to handle such order with his all requirements to fulfilled.

Therefore we can say that expected and normal activity levels reflect, in general, consumer demand.