Chapter 9 solutions (P9-28, -29, -40)

9-28(10 min.)Capacity management, denominator-level capacity concepts. 1.d 2.c, d 3.D 4.A 5.C 6.a, b 7.A 8.B 9.c, d 10.B 11.a, b

9-29(25 min.)Denominator-level problem

1.Budgeted fixed manufacturing overhead costs rates:

Budgeted FixedBudgeted Fixed

DenominatorManufacturingBudgetedManufacturing

Level CapacityOverhead perCapacityOverhead Cost

-------------------------------------------------

ConceptPeriodLevelRate

Theoretical$4,560,0003,600$1,266.67

Practical4,560,0002,4001,900.00

Normal4,560,0001,2003,800.00

Master-budget4,560,0001,4403,166.67

The rates are different because of varying denominator-level concepts. Theoretical and practical capacity levels are driven by supply-side concepts, i.e., “how much can produce?” Normal and master-budget capacity levels are driven by demand-side concepts, i.e., “how much can we sell?” (or “how much should we produce?”)

2.In order to incorporate fixed manufacturing costs into unit product costs, fixed manufacturing costs have to be unitized for inventory costing. Absorption costing is the method used for tax reporting and for financial reporting using generally accepted accounting principles. The choice of a denominator level becomes relevant under absorption costing because fixed costs are accounted for along with variable costs at the individual product level. Variable and throughput costing account for fixed costs as a lump sum, expensed in the period incurred.

3.The variances that arise from use of the theoretical or practical level concepts will signal that there is a divergence between the supply of capacity and the demand for capacity. This is useful input to managers. As a general rule, however, it is important not to place undue reliance on the production volume variance as a measure of the economic costs of unused capacity.

4....

9-28(10 min.)Capacity management, denominator-level capacity concepts. 1.d 2.c, d 3.D 4.A 5.C 6.a, b 7.A 8.B 9.c, d 10.B 11.a, b

9-29(25 min.)Denominator-level problem

1.Budgeted fixed manufacturing overhead costs rates:

Budgeted FixedBudgeted Fixed

DenominatorManufacturingBudgetedManufacturing

Level CapacityOverhead perCapacityOverhead Cost

-------------------------------------------------

ConceptPeriodLevelRate

Theoretical$4,560,0003,600$1,266.67

Practical4,560,0002,4001,900.00

Normal4,560,0001,2003,800.00

Master-budget4,560,0001,4403,166.67

The rates are different because of varying denominator-level concepts. Theoretical and practical capacity levels are driven by supply-side concepts, i.e., “how much can produce?” Normal and master-budget capacity levels are driven by demand-side concepts, i.e., “how much can we sell?” (or “how much should we produce?”)

2.In order to incorporate fixed manufacturing costs into unit product costs, fixed manufacturing costs have to be unitized for inventory costing. Absorption costing is the method used for tax reporting and for financial reporting using generally accepted accounting principles. The choice of a denominator level becomes relevant under absorption costing because fixed costs are accounted for along with variable costs at the individual product level. Variable and throughput costing account for fixed costs as a lump sum, expensed in the period incurred.

3.The variances that arise from use of the theoretical or practical level concepts will signal that there is a divergence between the supply of capacity and the demand for capacity. This is useful input to managers. As a general rule, however, it is important not to place undue reliance on the production volume variance as a measure of the economic costs of unused capacity.

4....

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