Effects of denominator-level concept choice. (20-35 minutes) Forza San Marino, Srl, installed standard costs and a flexible budget on 1 January 2000. The president had been pondering how fixed manufacturing overhead should be allocated to products. Machine-hours had been chosen as the allocation base. Her remaining uncertainty was the denominator-level concept for machine-hours. She decided to wait for the first month’s results before making a final choice of what denominator-level concept should be used from that day forward. lop8 In January 2000, the actual units of output had a standard of 70,000 machine-hours allowed. If the company used practical capacity as the denominator-level concept, the fixed manufacturing overhead spending variance would be EUR 10,000, unfavourable and the production-volume variance would be EUR 36,000, unfavourable. If the company used normal utilisation as the denominator-level concept, the productionvolume variance would be EUR 20,000, favourable. Budgeted fixed manufacturing overhead was EUR 120,000 for the month.

REQUIRED 1. Calculate the denominator level, assuming that the normal utilisation concept is chosen.
2. Calculate the denominator level, assuming that the practical capacity concept is chosen.
3. Suppose you are the executive vice-president. You want to maximise your 2000 bonus, which dep2nds on 1999 operating profit. Assume that the production-volume variance is charged or credited to income at year-end.
Which denominator-level concept would you favour? Why?