Many firms feel a strong obligation to establish and use a standard rate for fixed factory overhead because:
A) Generally accepted accounting principles in the U.S. require full costing of inventories for financial reporting purposes.
B) The resulting data are useful for performance-evaluation purposes.
C) Larger income tax deductions result when fixed overhead costs are treated as product costs rather than period costs.
D) This approach improves upon management's ability to more accurately forecast future overhead costs.
E) None of the above—fixed overhead costs are typically expensed as period costs.

Question

Quizplus · Accepted Answer

Generally accepted accounting principles in the U.S. require full costing of inventories for financial reporting purposes, which includes the use of a standard rate for fixed factory overhead. This standard rate is used to allocate fixed overhead costs to products and is included in the cost of inventory.

Answer: B
 The resulting data from using a standard rate for fixed factory overhead are useful for performance-evaluation purposes. This data can be used to analyze the profitability of products, departments, and the overall business.

Answer: C
 Treating fixed overhead costs as product costs rather than period costs can result in larger income tax deductions, as these costs are deducted when the associated inventory is sold. This can help to lower the tax liability for the business.

Answer: D
 Using a standard rate for fixed factory overhead can improve management's ability to more accurately forecast future overhead costs. By analyzing past trends and adjusting the standard rate as necessary, managers can better estimate future overhead costs and make more informed decisions.

Answer: E
 This statement is not true. While fixed overhead costs can be expensed as period costs, many businesses choose to allocate these costs to products using a standard rate for full costing purposes.

Many Firms Feel a Strong Obligation to Establish and Use