9-31 Alternative denominator-level capacity concepts, effect on operating income. Castle Lager has just purchased the Jacksonville Brewery. The brewery is two years old and uses absorption costing. It will "sell" its product to Castle Lager at $47 per barrel. Peter Bryant, Castle Lager's controller, obtains the following information about Jacksonville Brewery's capacity and budgeted fixed manufacturing costs for 2014: Home Page Layout Formulas Data Insert Review View Budgeted Fixed Manufacturing Overhead per Period $27,900,000 $27,900,000 $27,900,000 Hours of Production Production Barrels per Day 22 Days of 2 Denominator-Level Capacity Concept 4 Theoretical capacity 5 Practical capacity 6 Normal capacity utilization Master-budget capacity for each 7 half year 8 (a) January-June 2014 9 b) July-December 2014 per Period per Hour 545 358 510 410 348 20 348 20 $13,950,000 $13,950,000 174 174 20 315 20 505 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 2014, the Jacksonville Brewery reported these production results: Home Insert Page Layout Formulas Data 12 Beginning inventory in barrels, 1-1-2014 13 Production in barrels 14 Ending inventory in barrels, 12-31-2014 15 Actual variable manufacturing costs 16 Actual fixed manufacturing overhead costs 2,670,000 210,000 $80,634,000 $26,700,000 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 Jacksonville Brewery's operating income when the denominator-level capacity is (a) theoretical capacity, (b) practical capacity, and (c) normal capacity utilization.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Motivational considerations in denominator-level capacity selection (continuation of 9-31). 1. If the plant manager of the Jacksonville Brewery gets a bonus based on operating income, which denominator-level capacity concept would he prefer to use? Explain. 2. What denominator-level capacity concept would Castle Lager prefer to use for U.S. income-tax reporting? Explain. 3. How might the IRS limit the exibility of an absorption-costing company like Castle Lager attempting to minimize its taxable income?

9-31 Alternative denominator-level capacity concepts, effect on operating income. Castle Lager has just
purchased the Jacksonville Brewery. The brewery is two years old and uses absorption costing. It will "sell"
its product to Castle Lager at $47 per barrel. Peter Bryant, Castle Lager's controller, obtains the following
information about Jacksonville Brewery's capacity and budgeted fixed manufacturing costs for 2014:
Home
Page Layout
Formulas
Data
Insert
Review
View
Budgeted Fixed
Manufacturing
Overhead per Period
$27,900,000
$27,900,000
$27,900,000
Hours of
Production Production Barrels
per Day
22
Days of
2
Denominator-Level
Capacity Concept
4 Theoretical capacity
5 Practical capacity
6 Normal capacity utilization
Master-budget capacity for each
7 half year
8 (a) January-June 2014
9 b) July-December 2014
per Period
per Hour
545
358
510
410
348
20
348
20
$13,950,000
$13,950,000
174
174
20
315
20
505
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 2014, the Jacksonville Brewery reported these production results:
Home
Insert
Page Layout
Formulas
Data
12 Beginning inventory in barrels, 1-1-2014
13 Production in barrels
14 Ending inventory in barrels, 12-31-2014
15 Actual variable manufacturing costs
16 Actual fixed manufacturing overhead costs
2,670,000
210,000
$80,634,000
$26,700,000
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 Jacksonville 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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