Managing Earnings; Denominator Capacity Level; Ethics Any given cost information system is a function of a number of design choices. For product-costing purposes, one such design choice relates to how...

Managing Earnings; Denominator Capacity Level; Ethics Any given cost information system is a function of a number of design choices. For product-costing purposes, one such design choice relates to how overhead, particularly fixed manufacturing overhead, application rates are determined. As controller for your company, you have been asked to prepare a written presentation for an upcoming meeting of the board of directors of your company. In preparing this assignment, assume that board members are reasonably knowledgeable about financial reporting issues, but not necessarily about the intricacies of cost accounting. Your memo should address the three issues listed below

Required

1. Explain how manufacturing overhead rates are constructed in conventional cost accounting systems and in activity-based costing systems. Speak separately about fixed versus variable overhead application rates. What key choices must be made in establishing these rates? In answering this question, you might want to discuss differences (if any) between current IRS (income tax) requirements, internal reporting needs, and financial reporting requirements (e.g., FASB ASC 330-10-30, previously SFAS No. 151— available at www.fasb.org). 2. Your company uses a standard cost system. As such, at the end of each period it must “clean up” the accounts by disposing of any standard cost variances that might have occurred during the period. Explain how the variances for fixed manufacturing overhead are disposed of at the end of the period. In your answer, pay particular attention to the following two financial reporting issues: (a) the requirements of FASB ASC 330-10-30, and (b) how, under absorption costing, reported earnings can be “managed” by choice of the denominator volume used to establish the fixed overhead application rate. 3. Access the Institute of Management Accountant’s Statement of Ethical Professional Practice, revised July 1, 2017 (https://www.imanet.org/career-resources/ethics-center). Explain whether any of the stated standards relate to the issue of setting fixed overhead application rates and how any resulting production volume variances are disposed of at the end of the period for financial reporting purposes? Be specific.