Tolman Lager has just purchased the Buffalo Brewery. The brewery is two years old and uses absorption costing. It will "sell" its product to Tolman Lager at $43 per barrel. Peter Bryant, Tolman Lager's controller, obtains the following information about Buffalo Brewery's capacity and budgeted fixed manufacturing costs for 2017:

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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	$28,400,000	356	22	600
Practical capacity	$28,400,000	350	20	500
Normal capacity utilization	$28,400,000	350	20	420
Master-budget capacity utilization for each half year:
(a) January—June 2017	$14,200,000	175	20	310
(b) July—December 2017	$14,200,000	175	20	530

Read the requirements.

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 Buffalo Brewery reported these production results:

Beginning inventory in barrels, 1-1-2017	0
Production in barrels	2,590,000
Ending inventory in barrels, 12-31-2017	230,000
Actual variable manufacturing costs	$77,959,000
Actual fixed manufacturing overhead costs	$26,900,000

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 Buffalo Brewery's operating income when the denominator-level capacity is (a) theoretical capacity, (b) practical capacity, and (c) normal capacity utilization.

Answer rating: 100% (QA)

Ques 1 Ques 2 denominatorLevel Capacity concept theoretical capacity Pratical capacity normal capaci... View the full answer