The Effects of the Choice of Denominator Level

The Effects of the Choice of Denominator Level - Effect of...

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Effect of Using A Denominator Level on the Absorption Costing Income Statement The calculation of the fixed mfg overhead rate is usually based on estimates made at the beginning of the year. Budgeted Mfg Ohd rate = Estimated Fixed Ohd in $ Estimated units of activity In standard cost systems, the estimated units of activity is the denominator level and is some measure of production volume such as plant capacity, ‘normal volume’, master budget volume, etc. Whenever the actual production volume is different from the denominator volume , then there will be a volume variance, calculated in diagram form as follows: Budgeted Denom. Level X Fixed Ohd rate = Fixed Ohd Actual production X Fixed Ohd rate = Applied Fixed Ohd Volume Variance If the actual production level is > the denominator level, the volume variance will be favourable. If actual production is < the denominator level, the volume variance will be unfavourable (because of assumed lost sales, loss CM, and lost income.). The volume variance is treated as an adjustment to COGS.
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The Effects of the Choice of Denominator Level - Effect of...

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