$[$LO $15-2,15-4]15-39$ Ethics and Overhead Variance New Millennium Technologies uses a standard cost system. It

budgeted $50,000$ machine hours to manufacture $100,000$ units in $2022.$ The budgeted total fixed fac$-$

tory overhead was $$9,000,000.$ The company manufactured and sold $80,000$ units in $2022$ and would

report a loss of $$9,600,000$ after charging the production volume variance to Cost of Goods Sold

$($COGS$)$ of the period.

Bob Evans, VP$-$Finance, believes that the denominator activity level of $50,000$ machine hours

is too low. The maximum capacity of the firm is between $5,000,000$ and $6,000,000$ machine hours.

Bob considers a denominator level at half the low$-$end capacity to be reasonable. Furthermore, he

believes that the unfavorable production volume variance should be capitalized $($rather than writ$-$

ten off against the current period's earnings$)$ because the demand for the firm's products has been

increasing rapidly. A conservative projection of the firm's sales places the total sales at a level that

will require at least $5$ million machine hours in less than $5$ years. Bob was able to show a substantial

improvement in operating income after revising the cost data. He used the revised operating results

in briefing financial analysts.

Required

Consider the two changes being considered: $($a$)$ What is the estimated operating income $($loss$)$ if both

changes are implemented? $($b$)$ What portion of the change identified in part $($a$)$ is attributable to the

elimination of the unfavorable production volume variance? $($c$)$ What portion of the change identified in

part $($a$)$ is attributable to the decrease in fixed overhead cost applied to production?

Is it ethical for Bob to make the changes? $($Consult

www$.$imanet.org$/$career$-$resources$/$ethics$-$

center for the IMA's Statement of Ethical Professional Practice, revised July $1,2017.)$

Do the provisions of GAAP regarding inventory costing $($viz$.,$ FASB ASC $330-10-30,$ previously SFAS

No$.15$I$-$available at

www$.$fasb.org$)$ bear upon the current issue? If so$,$ how?

How does the choice of the denominator volume level in setting fixed overhead application rates provide

managers with an opportunity to manage earnings?