Effect on Budgeted Fixed Manufacturing Cost Rate

We now illustrate how each of these four denominator levels affects the budgeted fixed manufacturing cost rate. Stassen has budgeted (standard) fixed manufacturing overhead costs of $1,080,000 for 2020. This lump sum is incurred to provide the capacity to produce telescopes. The amount includes, among other costs, leasing costs for the facility and the compensation of the facility managers. The budgeted fixed manufacturing cost rates for 2020 for each of the four capacity-level concepts are depicted in column (4) below:

Screenshot of the spreadsheet shows the costs and units of various denominator-level capacity concepts.

Details of the spreadsheet are as follows:

  1. Theoretical capacity

    • Budgeted fixed manufacturing costs per year: $1,080,000

    • Budgeted capacity level (in units): 18,000

    • Budgeted fixed manufacturing cost per unit (calculated by dividing the fixed manufacturing costs per year by capacity level in units): $60

    • Budgeted variable manufacturing cost per unit: $200

    • Budgeted total manufacturing cost per unit (calculated by adding the budgeted fixed manufacturing costs per unit and budgeted variable manufacturing cost per unit): $260

  2. Practical capacity

    • Budgeted fixed manufacturing costs per year: $1,080,000

    • Budgeted capacity level (in units): 12,000

    • Budgeted fixed manufacturing cost per unit (calculated by dividing the fixed manufacturing costs per year by capacity level in units): $90

    • Budgeted variable manufacturing cost per unit: $200

    • Budgeted total manufacturing cost per unit (calculated by adding the budgeted fixed manufacturing costs per unit and budgeted variable manufacturing cost per unit): $290

  3. Normal capacity utilization

    • Budgeted fixed manufacturing costs per year: $1,080,000

    • Budgeted capacity level (in units): 10,000

    • Budgeted fixed manufacturing cost per unit (calculated by dividing the fixed manufacturing costs per year by capacity level in units): $108

    • Budgeted variable manufacturing cost per unit: $200

    • Budgeted total manufacturing cost per unit (calculated by adding the budgeted fixed manufacturing costs per unit and budgeted variable manufacturing cost per unit): $308

  4. Master-budget capacity utilization

    • Budgeted fixed manufacturing costs per year: $1,080,000

    • Budgeted capacity level (in units): 8,000

    • Budgeted fixed manufacturing cost per unit (calculated by dividing the fixed manufacturing costs per year by capacity level in units): $135

    • Budgeted variable manufacturing cost per unit: $200

    • Budgeted total manufacturing cost per unit (calculated by adding the budgeted fixed manufacturing costs per unit and budgeted variable manufacturing cost per unit): $335.

The significant difference in cost rates in column (4) (from $60 to $135) arises because of large differences in budgeted capacity levels under the different capacity concepts.

Budgeted (standard) variable manufacturing costs, in column (5), are constant at $200 per unit, leading to the total budgeted (standard) manufacturing cost per unit for alternative capacity-level concepts in column (6).

Because different denominator-level capacity concepts yield different budgeted manufacturing costs per unit, Stassen must decide which capacity level to use. Stassen is not required to use the same capacity-level concept, say, for management planning and control, external reporting to shareholders, and income tax purposes.

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