Overhead Variances in Nonmanufacturing Setting

The importance of overhead variances is also very important in settings outside of manufacturing. Managers of companies should consider variance analysis of all variable overhead costs when making pricing and product mix decisions. An astute manager will be able to find the most ideal costs for products if doing this,.

In service setting, fixed overhead variances are especially important. This is because using capacity effectively and to maximum capacity is essential to continued profitability. In these situations,  the information provided by overhead variances can be supplemented by the use managerial experiences and trends. Thus there is not need to restrict the accounting analysis of overhead variances only to manufacturing settings. Accountants can use this process of analysis in all situations.

IRS § 7701(o)- Economic Substance Test

New Statute, § 7701(o) of the Internal Revenue Code- Economic Substance Test 

If a taxpayer wants a transaction respected, Transaction must:

1. Transaction must change the economic position in a meaningful way, AND,
2. Taxpayer must have substantial non-tax purpose behind the transaction, 
3. Conjunctive test because of the AND. In essence, it is really the judicial doctrine, formally referred to at the business purpose test. 11th Circuit. 

§ 7702- More detail about the business purpose prong. Pre-tax profits have to be substantial in comparison to the present value in comparison to the after tax benefits.

§ 7701(5)(a) – The IRS and courts are supposed to decide this under the economic substance test

§ 6662- Penalty section. IMPOSES STRICT LIABILITY penalty for violating this. They can’t argue that they had reasonable cause to engage in the transaction.