Question

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.

Zing Lager has just purchased the Boise Brewery. The brewery is two years old and uses absorption costing. It will​ "sell" its product to Zing Lager at $ 48 per barrel. Peter​ Bryant, Zing ​Lager's controller, obtains the following information about Boise ​Brewery's capacity and budgeted fixed manufacturing costs for 2017​:

Denominator-Level Capacity Concept	Budgeted Fixed Manufacturing Overhead Per Period	Days of production per period	Hours of production per period	Barrels per hour
Theoretical capacity	$27,800,000	356	22	600
Practical capacity	$27,800,000	350	20	490
Normal capacity utilization	$27,800,000	350	20	395
Master Budget capacity for each half year
January – June 2017	$13,900,000	175	20	330
July-December 2017	$13,900,000	175	20	460

2. In 2017​, the Boise Brewery reported these production​ results:

Beginning inventory in barrels, 1-1-2017	0
Production in barrels	2,650,000
Ending inventory in barrels, 12-31-2017	230,000
Actual variable manufacturing costs	$80,692,500
Actual fixed manufacturing overhead costs	$27,000,000

Answer 1

Absorption-Costing Income Statement Normal Theoretical Practical Capacity Capacity Utilization Сарacity Revenues (2,420,000 bbls. $48 per bbl.) 116160000 116160000 116160000 Cost of goods sold: Beginning inventory 0 0 0 Variable mfg. costs 80692500 80692500 80692500 Fixed mfg. overhead costs allocated (2,650,000 units $5.92; $8.10; $10.05 per unit) Cost of goods available for sa Deduct ending inventory (230,000 units $36.37; $38.55; $40.50 per unit) 15688000 21465000 26632500 6: 10215750 107325000 -8365100 -8866500 -9315000 Adjustment for variances (add: all unfavorable) 5521866 11322863 356239 Cost of goods sold Gross margin 99338263 98812866 98366239 17347134 16821737 17793761 Other costs 0 0 0 Operating income 16821737 17347134 17793761 2650000 230000 2420000

Zing Lage Requirement a: Budgeted Fixed Budgeted Fixed Days of Hours of Budgeted Manufacturing Denominator-Level Manuf. Overhead Production Production Barrels Denominator Level Overhead Rate Capacity Concept (Barrels) per Period per Period per Day per Hour per Barrel 6 1/5 1 2 3 4 5 2 x 3 x 4 Theoretical capacity 27800000 356 22 600 4699200 5.92 Practical capacity 20 3430000 27800000 350 490 8.10 Normal capacity utilization 2765000 10.05 27800000 350 20 395 Master-budget utilization (a) January-June 2017 (b) July-December 2017 13900000 175 330 1155000 12.03 13900000 1610000 175 460 8.63 The differences arise for several reasons: a. The theoretical and practical capacity concepts emphasize supply factors and are consequently higher, while normal capacity utilization and master-budget utilization emphasize demand factors. b. The two separate six-month rates for the master-budget utilization concept differ because of seasonal differences in C budgeted production. Requirement b: Budgeted Fixed Mfg Denominator-Level Budgeted Variable Budgeted Total Mfg Fixed Mfg. Ovhd Fixed Mfg. Ovhd Ovhd Rate per Barrel Costs Allocated Capacity Concept Mfg. Cost Rate Variance Cost Rate 9 2650000 x ( 6) 10 27000000 (9) 6 7 8 6+7 X Theoretical capacity 11322863 5.92 30.45 36.37 15677137 U Practical capacity 5521866 8.10 30.45 38.55 21478134 IU Normal capacity utilization 40.50 26643761 10.05 30.45 356239 U 80692500 2650000 30.45 202