Forza San Marino Srl installed standard costs and a flexible budget on 1 January 2022. 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.

In January 2022, 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 €10 000, unfavourable and the production-volume variance would be €36 000, unfavourable. If the company used normal utilisation as the denominator-level concept, the production-volume variance would be €20 000, favourable. Budgeted fixed manufacturing overhead was €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 2022 bonus, which depends on 2022 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?