Tredz Inc., is a manufacturer of the very popular G36 motorcycles. The managemen
ID: 2563216 • Letter: T
Question
Tredz Inc., is a manufacturer of the very popular G36 motorcycles. The management at Tredz has recently adopted absorption costing and is debating which denominator-level concept to use. The G36 motorcycles sell for an average price of $8,800. Budgeted fixed manufacturing overhead costs for 2014 are estimated at $3,600,000. Tredz, Inc., uses subassembly operators that provide component parts. The following are the denominator-level options that management has been considering:
a.
Theoretical capacitylong dash—based on two shifts, completion of five motorcycles per shift, and a 360-day year—2×5×360=3,600.
b.
Practical capacitylong dash—theoretical capacity adjusted for unavoidable interruptions, breakdowns, and so forth—2×4x320=2,560.
c.
Normal capacity utilization—estimated at 2,000 units.
d.
Master-budget capacity utilizatio—the strengthening stock market and the growing popularity of motorcycles have prompted the marketing department to issue an estimate for 2014 of 2,400 units.
Requirements:
1.
Calculate the budgeted fixed manufacturing overhead cost rates under the four denominator-level concepts.
2.
What are the benefits to Tredz, 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?
Requirement 1. Calculate the budgeted fixed manufacturing overhead cost rates under each concept. (Round your answers to two decimal places.)
Budgeted fixed
Denominator level
manufacturing
capacity concept
overhead cost rate
Theoretical
_____________________
a.
Theoretical capacitylong dash—based on two shifts, completion of five motorcycles per shift, and a 360-day year—2×5×360=3,600.
b.
Practical capacitylong dash—theoretical capacity adjusted for unavoidable interruptions, breakdowns, and so forth—2×4x320=2,560.
c.
Normal capacity utilization—estimated at 2,000 units.
d.
Master-budget capacity utilizatio—the strengthening stock market and the growing popularity of motorcycles have prompted the marketing department to issue an estimate for 2014 of 2,400 units.
Explanation / Answer
1 Capacity Concept Budgeted Fixed Ohs Denominator Level Ohs rate Theoretical Concept 36,00,000 3600 1,000.00 Practical Capcity 36,00,000 2560 1,406.25 Normal Capacity 36,00,000 2000 1,800.00 Master Budget capacity 36,00,000 2400 1,500.00 2 Benefits to Tredz of using either theoretical capacity or practical capacity Volume variances that arise from use of Theoretical or Practical will signal divergence between supply of capacity and the demand for capacity.Theoretical capacity is rarely used – not ‘real’ Practical is frequently used Positive : useful input to managers Negitive: be careful not to put too much reliance on the Production volume variance as a measure of the economic costs of unused capacity. Fixed OH capacity costs are ‘lumpy’ 3 Negative and Positive aspects of master-budget denominator level Cost-based pricing: Negative aspects: Master Budget Volume leads to high prices when demand is low – further eroding demand (downward demand spiral) Master Budget Volume leads to low prices when demand is high – forgoing profits Positive aspects: Cost is based on demand and this price would be necessary to recover the cost. Master Budget Volume is a good benchmark for evaluating performance
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