Carlisle Company is a manufacturer of precision surgicaltools. It initiated standard costing and a flexible budget on January 1, 2011. The company president, MonicaCarlisle, has been pondering how fixed manufacturing overhead should be allocated to products. Machinehourshave been chosen as the allocation base. Her remaining uncertainty is the denominator level formachine-hours. She decides to wait for the first month's results before making a final choice of whatdenominator level should be used from that day forward.
During January 2011, the actual units of output had a standard of 37,680 machine-hours allowed. Thefixed manufacturing overhead spending variance was $6,000, favorable. If the company used practicalcapacity as the denominator level, the production-volume variance would be $12,200, unfavorable. If thecompany used normal capacity utilization as the denominator level, the production-volume variance wouldbe $2,400, unfavorable. Budgeted fixed manufacturing overhead was $96,600 for the month.
1. Compute the denominator level, assuming that the normal-capacity-utilization concept is chosen. Required
2. Compute the denominator level, assuming that the practical-capacity concept is chosen.
3. Suppose you are the executive vice president. You want to maximize your 2011 bonus, which dependson 2011 operating income. Assume that the production-volume variance is written off to cost of goodssold at year-end, and assume that the company expects inventories to increase during the year. Whichdenominator level would you favor? Why?