The Effects of the Choice of Denominator Level-1

On the other hand when master budget volume is used

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On the other hand, when Master Budget volume is used, actual production should be very close to denominator volume and a small volume variance will result. 3. Whether the Fixed MO rate is stable or varies from year to year Measures like Plant Capacity or Normal Volume do not change from year to year. As a result, they yield a stable Fixed MO rate. On the other hand, Master Budget volume does change each year and therefore yields a rate that varies from year to year. In summary, a low fixed MO rate (which yields lower costs and higher income) usually goes hand in hand with a large unfavourable volume variance (which increases Cost of Goods Sold and reduces income). Therefore, you can’t increase income by simply changing your choice of denominator level. However, your choice of denominator will affect whether you have a stable Fixed MO rate from year to year or a rate that varies. Most companies prefer a stable rate because it makes planning and pricing decisions easier. Summary of Effects of Using Various Denominator Levels Type of Denominator Level Usual Size of Volume Variance large or small Stable MO rate or rate that varies each year? Relatively high or relatively low fixed MO per unit? Plant capacity Large U stable low Normal volume Some years U, some years F stable medium Master Budget Small U or F Varies each year since MB level varies each year Depends on master budget level for a given year
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  • Winter '12
  • Farrar
  • mo rate, Fixed MO rate

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