Can anyone help me with this?Please include citation and need to be in a memo fo

Question

Can anyone help me with this?Please include citation and need to be in a memo format .Thank you very much!

Researching GAAP Situation Fenimore Manufacturing Company uses the average cost method. It has followed a policy of expensing all its manufacturing cost varian- ces. It is considering a change in its policy that will involve allocating them between cost of ods sold and inventory. Fenimore's presi- dent has asked you which of these alternative policies is consistent with GAAP Directions Research the related generally accepted accounting principles and prepare a short memo to the president. Cite your references and applicable paragraph numbers.

Explanation / Answer

To:                  President, Fenimore Company

From:             Write your name here

I have conducted the research over the issue of which method of accounting for manufacturing cost variance is as per GAAP. As per ARB 43, Chapter 4, par. 6, fn 3, for the purpose of inventory evaluation, the costs of the standard can be utilized if the adjustment in those is done at reasonable intervals to indicate the present situations so that at the balance sheet date, standard costs reasonably approximate costs computed under one of the recognized bases. For instances, the firm can disclose that the inventory is reported at "standard costs, approximating average costs."

The policy of expensing all variances adopted a present time seems to be a violation of generally accepted accounting principles due to the non-adjustment of the ending inventory cost for the actual experience of the current period. In fact, the cost is dependent on the budgeted standard costs.   But in case of a negative variance, and if the cost of goods sold is used to include them, it will be consistent with the conservatism convention.

The new policy which has been implemented for the allocation of variances between costs of goods sold and inventory clearly follows ARB 43, Chapter 4, par. 6. . Thus I recommend that the new policy should be implemented.

The other aspect which has to be considered is materiality. If there is no materiality of variances, any method can be implemented and the methods should be adopted by the company which is more cost-effective. Please note that my recommendation only considers external financial reporting and ignores any managerial issues.

Reference:-

Inventory Valuation Methods and their Impact on your Business. (2017, April 24). Retrieved April 13, 2018

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