Cost Accounting (14th Edition)

9-25 Capacity management, denominator-level capacity concepts. Match each of the following
items with one or more of the denominator-level capacity concepts by putting the appropriate letter(s)
by each item:
ASSIGNMENT MATERIAL 333
a. Theoretical capacity
b. Practical capacity
c. Normal capacity utilization
d. Master-budget capacity utilization
1. Measures the denominator level in terms of what a plant can supply
2. Is based on producing at full efficiency all the time
3. Represents the expected level of capacity utilization for the next budget period
4. Measures the denominator level in terms of demand for the output of the plant
5. Takes into account seasonal, cyclical, and trend factors
6. Should be used for performance evaluation in the current year
7. Represents an ideal benchmark
8. Highlights the cost of capacity acquired but not used
9. Should be used for long-term pricing purposes
10. Hides the cost of capacity acquired but not used
11. If used as the denominator-level concept, would avoid the restatement of unit costs when expected
demand levels change
9-26 Denominator-level problem. Thunder Bolt, Inc., is a manufacturer of the very popular G36 motorcycles.
The management at Thunder Bolt has recently adopted absorption costing and is debating which
denominator-level concept to use. The G36 motorcycles sell for an average price of $8,200. Budgeted fixed
manufacturing overhead costs for 2012 are estimated at $6,480,000. Thunder Bolt, Inc., uses subassembly
operators that provide component parts. The following are the denominator-level options that management
has been considering:
a. Theoretical capacity—based on three shifts, completion of five motorcycles per shift, and a 360-day
year—3 * 5 * 360 = 5,400.
b. Practical capacity—theoretical capacity adjusted for unavoidable interruptions, breakdowns, and so
forth—3 * 4 * 320 = 3,840.
c. Normal capacity utilization—estimated at 3,240 units.
d. Master-budget capacity utilization—the strengthening stock market and the growing popularity of
motorcycles have prompted the marketing department to issue an estimate for 2012 of 3,600 units.
1. Calculate the budgeted fixed manufacturing overhead cost rates under the four denominator-level
concepts.
2. What are the benefits to Thunder Bolt, Inc., of using either theoretical capacity or practical capacity?
3. Under a cost-based pricing system, what are the negative aspects of a master-budget denominator
level? What are the positive aspects?
9-27 Variable and absorption costing and breakeven points. Mega-Air, Inc., manufactures a specialized
snowboard made for the advanced snowboarder. Mega-Air began 2011 with an inventory of 240 snowboards.
During the year, it produced 900 boards and sold 995 for $750 each. Fixed production costs were
$280,000 and variable production costs were $335 per unit. Fixed advertising, marketing, and other general
and administrative expenses were $112,000 and variable shipping costs were $15 per board. Assume that
the cost of each unit in beginning inventory is equal to 2011 inventory cost.
1. Prepare an income statement assuming Mega-Air uses variable costing.
2. Prepare an income statement assuming Mega-Air uses absorption costing. Mega-Air uses a denominator
level of 1,000 units. Production-volume variances are written off to cost of goods sold.
3. Compute the breakeven point in units sold assuming Mega-Air uses the following:
a. Variable costing
b. Absorption costing (Production = 900 boards)
4. Provide proof of your preceding breakeven calculations.
5. Assume that $20,000 of fixed administrative costs were reclassified as fixed production costs.
Would this change affect breakeven point using variable costing? What if absorption costing were
used? Explain.
6. The company that supplies Mega-Air with its specialized impact-resistant material has announced a
price increase of $25 for each board. What effect would this have on the breakeven points previously
calculated?
Required
Required