Alternative denominator-level concepts. Lucky Lager recently purchased a brewing plant from a bankrupt company. It was constructed only two years ago. The plant has budgeted fixed manufacturing overhead of $50 million per year ($4,167 million each month) in 2007.

Paul Vautin, the controller of the brewery, must decide on the denominator-level concept to use in its absorption costing system for 2007. The options available to him are A. Theoretical capacity: 600 barrels an hour for 24 hours a day for 365 days = 5,256,000 barrels B. Practical capacity: 500 barrels an hour for 20 hours a day for 350 days = 3,500,000 barrels C. Normal capacity utilization for 2007: 400 barrels an hour for 20 hours a day for 350 days =

2,800,000 barrels D. Master-budget capacity utilization for 2007 (separate rates computed for each half-year):

January to June 2007 budget—320 barrels an hour for 20 hours a day for 175 days =

1,120,000 barrels July to December 2007 budget—480 barrels an hour for 20 hours a day for 175 days =

1,680,000 barrels Variable standard manufacturing costs per barrel are $51.40 (variable direct materials,

$38.40 variable manufacturing labour, $6.00; and variable manufacturing overhead, $7.00).

The brewery “sells” its output to the sales division of Lucky Lager at a budgeted price of

$82.00 per barrel.

Required 1. Compute the budgeted fixed manufacturing overhead rate using each of the four denominator-level concepts for

(a) beer produced in March 2007 and

(b) beer produced in $eptember 2007. Explain why any differences arise.

2. Explain why the theoretical capacity and practical capacity concepts are different.

3. Which denominator-level concept would the plant manager of the brewery prefer when senior management of Lucky Lager is judging plant manager performance during 2007?

Explain.