Leafs Ale 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 2018. Austin Matthews, the controller of the brewery, must decide on the denominator level concept to use in its absorption costing system for 2018. The options available to him are:

Theoretical capacity: 600 barrels an hour for 24 hours a day for 365 days=5,256,000365 days=5,256,000 barrels

Practical capacity: 500 barrels an hour for 20 hours a day for 350 days=3,500,000350 days=3,500,000 barrels

Normal capacity utilization for 2018: 400 barrels an hour for 20 hours a day for 350 days=2,800,000350 days=2,800,000 barrels

Master-budget capacity utilization for 2018 (separate rates computed for each half-year):

January to June 2018 budget320 barrels an hour for 20 hours a day for 175 days=1,120,000175 days=1,120,000 barrels

July to December 2018 budget480 barrels an hour for 20 hours a day for 175 days=1,680,000175 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 Leafs Ale at a budgeted price of $82.00 per barrel.

In 2018, the brewery of Leafs Ale showed these results:

Number of Barrels:
Inventory, January 1, 2018	0
Production	2,600,000
Inventory, December 31, 2018	200,000

The brewery had actual costs of:

Variable Manufacturing	$ 144,456000
Fixed Manufacturing Overhead	48,758,400

The sales division of Leafs Ale purchased 2,400,000 barrels in 2018 at the $82 per barrel rate. All manufacturing variances are written off to COGS in the period in which they are incurred.

Required

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

(a) beer produced in March 2018 and

(b) beer produced in September 2018.

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 Leafs Ale is judging plant manager performance during 2018? Explain.

4. Compute the operating income of the brewery using the following:

(a) theoretical capacity,

(b) practical capacity, and

(c) normal capacity utilization denominator-level capacity concepts.

Explain any differences between (a), (b), and (c).

5. What denominator-level concept might Leafs Ale prefer for income tax reporting? Explain.