When Implementing a Standard Cost System, One of the System-Design

question 112

Essay

When implementing a standard cost system, one of the system-design choices that management must make is choice of the denominator volume level for calculating the fixed overhead application rate, which is used to determine product costs. Various alternatives exist for the denominator volume.
Required:
1. List and briefly describe the various alternatives that exist for defining the denominator activity level for product-costing purposes.
2. What provisions of generally accepted accounting principles (GAAP) and current income tax requirements in the U.S. affect the decision as to choice of the denominator volume level when developing the standard fixed overhead application rate? Provide an overview of the requirements in this regard.

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Definitions:

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