Stenback is a manufacturer of Sten kits. It uses absorption costing based on standard costs and reports the following data for 2017:

Required
There are no price spending, or efficiency variances. Actual operating costs equal budgeted operating costs. 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.

1. What is the production-volume variance in 2017 when the denominator level is (a) theoretical capacity, (b) practical capacity, and (c) normal capacity utilization?

2. Prepare absorption costing-based income statements for Stenback Corporation using theoretical capacity, practical capacity, and normal capacity utilization as the denominator levels.

3. Why is the operating income under normal capacity utilization lower than the other two scenarios?

4. Reconcile the difference in operating income based on theoretical capacity and practical capacity with the difference in fixed manufacturing overhead included in inventory.

Transcribed Image Text:

Theoretical capacity Practical capacity Normal capacity utilization Selling price Beginning inventory Production Sales volume |$ Variable budgeted manufacturing cost Total budgeted fixed manufacturing costs $3,000,000 Total budgeted operating (non-manuf.) costs (all fixed) $ 500,000 |$ 300,000 units 279,070 units 232,558 units 40,000 units 240,000 units 260,000 units 50 per unit 10 per unit Theoretical capacity Practical capacity Normal capacity utilization Selling price Beginning inventory Production Sales volume |$ Variable budgeted manufacturing cost Total budgeted fixed manufacturing costs $3,000,000 Total budgeted operating (non-manuf.) costs (all fixed) $ 500,000 |$ 300,000 units 279,070 units 232,558 units 40,000 units 240,000 units 260,000 units 50 per unit 10 per unit

Answer rating: 100% (QA)

ANSWERS 1 The productionvolume variance in 2017 when the denominator level is a theoretical capacity ... View the full answer