Home Insert Page Layout Formulas Data Review A 1 Theoretical capacity 2 Practical capacity 3 Normal capacity utilization 4 Selling price 5 Beginning inventory 6 Production 7 Sales volume 8 Variable budgeted manufacturing cost 9 Total budgeted fixed manufacturing costs 10 Total budgeted operating (non-manuf.) costs (all fixed) $ 500,000 300,000 units 279,070 units 232,558 units 50 per unit 40,000 units 240,000 units 260,000 units 10 per unit $3,000,000 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 Magic Me Corporation using theoretical ca- pacity, 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. Required

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter11: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 11.16E

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Denominator-level choices, changes in inventory levels, effect on operating income. Magic Me is a manufacturer of magic kits. It uses absorption costing based on standard costs and reports the following data for 2017:

Home
Insert
Page Layout
Formulas
Data
Review
A
1 Theoretical capacity
2 Practical capacity
3 Normal capacity utilization
4 Selling price
5 Beginning inventory
6 Production
7 Sales volume
8 Variable budgeted manufacturing cost
9 Total budgeted fixed manufacturing costs
10 Total budgeted operating (non-manuf.) costs (all fixed) $ 500,000
300,000 units
279,070 units
232,558 units
50 per unit
40,000 units
240,000 units
260,000 units
10 per unit
$3,000,000
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 Magic Me Corporation using theoretical ca-
pacity, 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.
Required

Definition Definition System of assigning an estimated cost to the product (instead of the actual cost) so that the product cost can be determined well in advance and the pricing of the product can be done on time. Since the actual cost cannot be predicted at the initial stage of the production process, the estimated cost is recorded in the books. Any deviation of the estimated cost of the actual cost is adjusted in the books at the end of the period.

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