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How manufacturing overhead rates are constructed

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ASSIGNMENT 1: Managing Earnings, Denominator Capacity-Level, and Ethics

Explain how manufacturing overhead rates are constructed in conventional cost accounting 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 and internal reporting purposes, and between financial reporting requirements, i.e., applicable GAAP (FASB ASC 330-10-30, previously SFAS No. 151, available using the FASB link and internal reporting purposes.

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