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

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.

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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

$27,900,000

4,620,000

=

$6.04

Part 3

Practical capacity

$27,900,000

3,504,600

=

$7.96

Part 4

Normal capacity utilization

$27,900,000

2,902,800

=

$9.61

Part 5

Master-budget capacity for each half year:
(a) JanuaryJune 2020	$13,950,000		1,132,800	=	$12.31

Part 6

(b) JulyDecember 2020

$13,950,000

1,770,000

=

$7.88

Part 7

Explain why they are different.

The

theoretical and practical capacity

concepts emphasize supply factors, while

normal capacity utilization and master-budget utilization

concepts emphasize demand factors.

The six-month rates for the master-budget utilization concept

are different because of seasonal differences in budgeted production.

Part 8

Requirement 2. Compute the

Cleveland

Brewery's operating income when the denominator-level capacity is (a) theoretical capacity, (b) practical capacity, and (c) normal capacity utilization.

Begin by completing the following table to help you compute the operating income for each denominator-level capacity concept. (Round the rates to the nearest cent.)

	Per barrel
	Budgeted fixed	Budgeted	Budgeted
Denominator-level	MOH rate	variable mfg	total mfg	Fixed MOH
capacity concept	per barrel	cost rate	cost rate	costs allocated
Theoretical capacity	$6.04	$30.45	$36.49	$15,885,200

Part 9

Practical capacity

7.96

30.45

38.41

20,934,800

Part 10

Normal capacity utilization

9.61

30.45

40.06

25,274,300

Part 11

Now compute the operating income for each capacity concept, one at a time. Label the variances as favorable (F) or unfavorable (U). (Enter a "0" for any zero balance accounts.)

	Theoretical
	capacity
Revenues
Cost of goods sold
Beginning inventory
Variable manufacturing costs
Fixed manufacturing overhead cost allocated
Cost of goods available for sale
Deduct ending inventory
Adjustment for variances
Cost of goods sold
Gross margin
Other costs
Operating income

Part 8

When calculating the operating income under the different capacity concepts, only the budgeted total manufacturing cost rate will change. The only amount this affects is the ending inventory, therefore, the amounts that do not change have already been entered in for your convenience. Recalculate the cost of goods available for sale and the ending inventory, then finish the calculations for operating income, calculating each capacity concept one at a time.

	Theoretical
	capacity
Revenues
Cost of goods sold
Beginning inventory
Variable manufacturing costs
Fixed manufacturing overhead cost allocated
Cost of goods available for sale
Deduct ending inventory
Adjustment for variances
Cost of goods sold
Gross margin
Other costs
Operating income

Practical
capacity

Normal capacity
utilization