Pearmain Lager has just purchased the Buffalo Brewery. The brewery is two years old and uses absorption costing. It will "sell" its product to Pearmain Lager at $45 per barrel. Peter Bryant, Pearmain Lager's controller, obtains the following information about Buffalo Brewery's capacity and budgeted fixed manufacturing costs for 2017:
Data table Budgeted Fixed Days of Hours of Manufacturing Production Production Barrels per Overhead per Period per Period per Day Hour $ 28,100,000 356 24 540 28,100,000 352 20 495 $ 28,100,000 352 20 400 Denominator-Level Capacity Concept Theoretical capacity Practical capacity Normal capacity utilization Master-budget capacity utilization for each half year: (a) January-June 2017 (b) July-December 2017 $ $ 176 20 325 14,050,000 14,050,000 $ 176 20 475 Print Done 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 2017, the Buffalo Brewery reported these production results: Beginning inventory in barrels, 1-1-2017 0 Production in barrels 2,580,000 Ending inventory in barrels, 12-31-2017 200,000 Actual variable manufacturing costs $ 77,658,000 Actual fixed manufacturing overhead costs $ 27,300,000 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 Buffalo Brewery's operating income when the denominator-level capacity is (a) theoretical capacity, (b) practical capacity, and (c) normal capacity utilization. Print Done Data table Budgeted Fixed Days of Hours of Manufacturing Production Production Barrels per Overhead per Period per Period per Day Hour $ 28,100,000 356 24 540 28,100,000 352 20 495 $ 28,100,000 352 20 400 Denominator-Level Capacity Concept Theoretical capacity Practical capacity Normal capacity utilization Master-budget capacity utilization for each half year: (a) January-June 2017 (b) July-December 2017 $ $ 176 20 325 14,050,000 14,050,000 $ 176 20 475 Print Done 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 2017, the Buffalo Brewery reported these production results: Beginning inventory in barrels, 1-1-2017 0 Production in barrels 2,580,000 Ending inventory in barrels, 12-31-2017 200,000 Actual variable manufacturing costs $ 77,658,000 Actual fixed manufacturing overhead costs $ 27,300,000 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 Buffalo Brewery's operating income when the denominator-level capacity is (a) theoretical capacity, (b) practical capacity, and (c) normal capacity utilization. Print Done
