Alcal Partners uses absorption costing based on standard costs and reports the following data for 2021: Theoretical capacity 360 000 units Practical capacity 300 000 units Normal capacity 240 000 units Selling price R30 per unit Beginning inventory 25 000 units Production 260 000 units Sales volume 280 000 units Variable budgeted manufacturing cost R3 per unit Total budgeted fixed manufacturing costs R3 600 000 Total budgeted operating costs (all fixed) R1 000 000 The production volume variance is written off to cost of goods sold. For each choice of denominator level, the budgeted production cost per unit is also the cost per unit of beginning in
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Alcal Partners uses absorption costing based on
| Theoretical capacity | 360 000 | units |
| Practical capacity | 300 000 | units |
| Normal capacity | 240 000 | units |
| Selling price | R30 | per unit |
| Beginning inventory | 25 000 | units |
| Production | 260 000 | units |
| Sales volume | 280 000 | units |
| Variable budgeted manufacturing cost | R3 | per unit |
| Total budgeted fixed |
R3 600 000 | |
| Total budgeted operating costs (all fixed) | R1 000 000 |
The production volume variance is written off to cost of goods sold. For each choice of denominator level, the budgeted production cost per unit is also the cost per unit of beginning inventory.
Required:
3.1 Calculate the production volume variance in 2021 when the denominator level is:
a. theoretical capacity
b. practical capacity
c. normal capacity
3.2 Prepare absorption costing income statement of Alcal Partners using theoretical capacity, practical capacity, and normal capacity as the denominator levels.
3.3 Explain why the operating income under normal capacity utilization lower than the other two scenarios.
3.4 Reconcile the difference in operating income based on the theoretical capacity and practical capacity
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