The order the financial statements are prepared is as follows: ...

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The order the financial statements are prepared is as follows:
 a. statement of owner's equity, income statement, balance sheet
  b. income statement, balance sheet, statement of owner's equity
  c. income statement, statement of owner's equity, balance sheet
  d. balance sheet, income statement, statement of owner's equity

Question 2

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 2014 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 capacitybased on three shifts, completion of five motorcycles per shift, and a 360-day year3  5  360 = 5,400.
  b. Practical capacitytheoretical capacity adjusted for unavoidable interruptions, breakdowns, and so forth3  4  320 = 3,840.
  c. Normal capacity utilizationestimate d at 3,240 units.
  d. Master-budget capacity utilizationthe strengthening stock market and the growing popularity of motorcycles have prompted the marketing department to issue an estimate for 2014 of 3,600 units.
 
  Required:
  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?

[jennafosdick]

Answer to Question 1

C

Answer to Question 2

1. Budgeted fixed manufacturing overhead costs rates:

Denominator
Level Capacity
Concept Budgeted Fixed
Manufacturing
Overhead per
Period
Budgeted
Capacity
Level Budgeted Fixed
Manufacturing
Overhead Cost
Rate
Theoretical  6,480,000 5,400  1,200.00
Practical 6,480,000 3,840 1,687.50
Normal 6,480,000 3,240 2,000.00
Master-budget 6,480,000 3,600 1,800.00

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 I produce? Normal and master-budget capacity levels are driven by demand-side concepts, i.e., how much can I sell? (or how much should I produce?)

2. 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.

3. Under a cost-based pricing system, the choice of a master-budget level denominator will lead to high prices when demand is low (more fixed costs allocated to the individual product level), further eroding demand; conversely, it will lead to low prices when demand is high, forgoing profits. This has been referred to as the downward demand spiralthe continuing reduction in demand that occurs when the prices of competitors are not met and demand drops, resulting in even higher unit costs and even more reluctance to meet the prices of competitors. The positive aspects of the master-budget denominator level are that it is based on demand for the product and indicates the price at which all costs per unit would be recovered to enable the company to make a profit. Master-budget denominator level is also a good benchmark against which to evaluate performance.

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Excellent

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Gracias!