Denomiator-level choices, changes in inventory levels, effect on operating income. Koshu Corporation is a manufacturer of computer accessories. It uses absorption costing based on standard costs and reports the following data for 2011:
Theoretical capacity 280,000 units
Practical capacity 224,000 units
Normal capacity utilization 200,000 units
Selling price $ 40 per unit
Beginning inventory 20,000 units
Production 220,000 units
Sales volume 230,000 units
Variable budgeted manufacturing costs $ 5 per unit
Total budgeted fixed manufacturing costs $2,800,000
Total budgeted operating (nonmanuf.) costs (all fixed) $ 900,000
There are no price, spending, or efficiency variances. Actual operating costs equal budgeted operating costs. The production-volume variance is written off to cost of goods sold. For each choice of denominator level, the budgeted production cost per unit is also the cost per unit of beginning inventory.
1. What is the production-volume variance in 2011 when the denominator level is (a) theoretical capacity, (b) practical capacity, and (c) normal capacity utilization?
2. Prepare absorption costing-based income statements for Koshu Corporation using theoretical capacity, practical capacity, and normal capacity utilization as the denominator levels.
3. Why is the operating income under normal capacity utilization lower than the other two scenarios?
4. Reconcile the difference in operating income based on theoretical capacity and practical capacity with the difference in fixed manufacturing overhead included in inventory.