Home Insert Page Layout Formulas Data Review View B Budgeted Fixed Manufacturing Overhead per Period $27,900,000 $27,900,000 $27,900,000 Hours of Days of Denominator-Level Production Production Barrels 2 per Period 358 per Hour 545 Capacity Concept 4 Theoretical capacity 5 Practical capacity 6 Normal capacity utilization Master-budget capacity utilization 7 for each half year: 8 (a) January-June 2017 9 (b) July–December 2017 per Day 22 3 348 20 510 410 348 20 20 $13,950,000 $13,950,000 174 315 174 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 2017, the Jacksonville Brewery reported these production results: Required Home Insert Page Layout Formulas Data |12 Beginning inventory in barrels, 1-1-2017 |13 Production in barrels |14 Ending inventory in barrels, 12-31-2017 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.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
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
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