Bieres Ronsard SA recently purchased a brewing plant from a bankrupt company7. T
ID: 2472100 • Letter: B
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Bieres Ronsard SA recently purchased a brewing plant from a bankrupt company7. The brewery is in Montpazier, France. It was constructed only two yeard ago. The plant has budgetedery is in Montpaziet, France. It was constructed only two years ago. The plant has budgeted fixed manufacturing overhead of 42 million (3.5 million each month) in 2011. Alaim Cassandre, the accountant of the brewery, must decide on the denominator-level concept to use in its absorption costing system for 2011. The options available to him are a Theoretical capacity: 600 barrels an hour for 24 hours a day times 365 days = 5 256000 barrels. b Practical capacity: 500 barrels an hour for 20 hours a day times 350 days = 3 500 000 barrels. c Normal utilisation for 2011: 400 barrels an hour for 20 hours a day times 350 days = 2 800 000 barrels. d Master-budget utilisation for 2011 (separate rates calculated for each half-year): January to June 2011 budget: 320 barrels an hour for 20 hours a day times 175 days = 1 680 000 barrels. Variable standard manufacturing costs per barrel are 45 (variable direct materials, 35; variable manufacturing labour, 6; and variable manufacturing overhead, 7). The Montpazier brewery 'sells' its output to the sales division of Biers Ronsard at a budgeted price of 68 per barrel. Required 1 Calculate the budgeted fixed manufacturing overhead rate using each of the four denominator-level concepts for (a) beer produced in March 2011 and (b) beer produced in September 2.11. Explain why any differences arise. 2 Explain why the theoretical capacity and practical capacity concepts are different. 3 Which denomjnator-level concept would the plant manager of the Montpazier brewery prefer when senior management of Bieres Ronsard is judging plant manager performance during 2.11? Explain.Explanation / Answer
1) OH rates:(E/barrel) month of production basis march september theoretical capacity 7.99 7.99 practical capacity 12.00 12.00 normal capacity 18.75 12.75 The rates for the two months is different only in the OH absorption rate using normal capacity. This is because the normal capacity is taken as 1,120,000 barrels for the 1st half and 1,680,000 barrels for the 2nd half. Calculations are given below: Basis: Theoretical capacity budgeted OH/theoretical capacity = 42,000,000/5,256,000 = E7.99/barrel Basis: Practical capacity: budgeted OH/practical = 42,000,000/3,500,000 = E12.00/barrel Basis: Normal capacity: for 1st half-january to june: 21,000,000/1,120,000 = E18.75/barrel for 2nd half-july to december: 21,000,000/1,680,000 = E12.5/barrel 2) The theoretical capacity is based on the rate of production that the machine is designed to produce and assumes that the machine would be available for 24 hours on all days in a period--"FULL EFFICIENCY ALL THE TIME". The practical capacity, on the other hand, estimates the machine availability and the no of days available on a realistic basis. It considers the time required for normal maintenance and other interruptions like shut doen for holidays etc. For these reasons, these two concepts are different. 3) The plant manager would prefer the rates based on budget capacity. Budget is what is planned for based on normal capacity and is more realistic of what is going to happen. Accordingly, the plant manger has a higher allowance for OH expenditure in the first half at 18.75/barrel.
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