Mico Devices Case

1. These different percentages matter because this breakdown of the different costs give MDD an idea of how their costs are distributed when they have excess capacity. MDD is looking into several ways to deal with their excess capacity. Based on these cost numbers, MDD can run a sensitivity analysis to determine how these percentages would change if they were to implement their possible new strategies of in-sourcing, using different capacity cost allocation methods, and responding to the integrated circuit market.

2. Production-volume variance represents the difference between budgeted fixed manufacturing costs and fixed manufacturing overhead allocated based on the actual output produced. An unfavorable production-volume variance arises if budgeted fixed overhead is higher than allocated fixed overhead. A favorable production-volume variance occurs when budgeted fixed overhead is lower than allocated fixed overhead. If MDD uses practical capacity, the denominator level sets the cost of capacity, regardless of demand. If they choose to use expected actual capacity or normal capacity, which base their capacity levels on demand, this would hide the amount of unused capacity. So, if MDD wanted to highlight the impact of unused capacity they should implement a practical capacity alternative. MDD could write-off variances to cost of goods sold and the objective of this would be to write off the portion of the variance that represents the cost of capacity not used to support production.

3. Of these four causes of excess capacity, only two should be treated the same and included in product costs. The two things that should be focused on are short-term yield fluctuations and lumpy capacity because their effects can be recognized and computed. The changes in product mix and long-term yield fluctuations are more uncertain because they are harder to accurately project