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:

Measurement Differences

Discrepancies that arise when comparing or converting financial information due to differing methodologies, assumptions, or standards.

IFRS

A collection of accounting norms established by the International Accounting Standards Board (IASB) known as International Financial Reporting Standards, which direct the global preparation of financial statements.

U.S. GAAP

Generally Accepted Accounting Principles in the United States, a standard framework of accounting rules for financial reporting.

IFRS

International Financial Reporting Standards; a set of accounting standards developed by the International Accounting Standards Board (IASB) for international use.