Acc315 Cost Accounting: 9-32 Lucky Lager has just purchased the Austin Brewery

Acc315 Cost Accounting

9-32 Alternative denominator-level capacity concepts, effect on operating income
Lucky Lager has just purchased the Austin Brewery. The brewery is two years old and uses absorption costing. It will “sell” its product to Lucky Lager at $45 per barrel. Paul Brandon, Lucky Lager’s controller, obtains the following information about Austin Brewery’s capacity and budgeted fixed manufacturing costs for 2009:
Denominator-level Capacity Concept Budgeted Fixed Manufacturing Overhead per Period Days of Production per Period Hours of Production per Day Barrels per Hour
Theoretical Capacity $28,000,000 360 24 540
Practical Capacity $28,000,000 350 20 500
Normal capacity utilization $28,000,000 350 20 400
Master-budget capacity for each half year
(a) January-June 2009 $14,000,000 175 20 320
(b) July-December 2009 14,000,000 175 20 480

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 2009, the Austin Brewery reported these production results:
Beginning inventory in barrels, 1-1-2009 -
Production in barrels 2,600,000
Ending inventory in barrels, 12-31-2009 200,000
Actual variable manufacturing costs $78,520,000
Actual fixed manufacturing overhead costs $27,088,000
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.
3. Compute the Austin 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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