9.3

Superior Lager has just purchased the Cleveland Brewery. The brewery is 2 years old and uses absorption costing. It will "sell" its product to Superior Lager at $46 per barrel. Peter Bryant, Superior Lager's controller, obtains the following information about Cleveland Brewery's capacity and budgeted fixed manufacturing costs for 2020:

Data table

	A	B	C	D	E
1	Denominator-Level Capacity Concept	Budgeted Fixed Manufacturing Overhead per Period	Days of Production per Period	Hours of Production per Day	Barrels per Hour
2	Theoretical capacity	$27,900,000	350	24	550
3	Practical capacity	$27,900,000	354	20	495
4	Normal capacity utilization	$27,900,000	354	20	410
5	Master-budget capacity utilization for each half year:
6	(a) JanuaryJune 2020	$13,950,000	177	20	320
7	(b) JulyDecember 2020	$13,950,000	177	20	500

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Requirements

1. Compute the budgeted fixed manufacturing overhead rate per barrel for each of the denominator-level capacity concepts. Explain why they are different.

2. In

2020, the Cleveland Brewery reported these production results:

	A	B
12	Beginning inventory in barrels, 1-1-2020	0
13	Production in barrels	2,630,000
14	Ending inventory in barrels, 12-31-2020	230,000
15	Actual variable manufacturing costs	$80,083,500
16	Actual fixed manufacturing overhead costs	$27,400,000

There are no variable cost variances. Fixed manufacturing overhead cost variances are written off to cost of goods sold in the period in which they occur. Compute the Cleveland Brewery's operating income when the denominator-level capacity is (a) theoretical capacity, (b) practical capacity, and (c) normal capacity utilization.

Requirement 1. Compute the budgeted fixed manufacturing overhead rate per barrel for each of the denominator-level capacity concepts. Explain why they are different.

Begin by determing the formula to calculate the budgeted fixed manufacturing overhead rate per barrel, then compute the rate for each of the denominator-level capacity concepts. (Abbreviations used: Budg. = budgeted, MOH = manufacturing overhead. Round the rates to the nearest cent.)

					Budgeted fixed
	Budg. fixed MOH per period		Budg. denominator level (barrels)	=	MOH rate per barrel

Part 2

Theoretical capacity

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