For tax reporting purposes in the United States, the Internal Revenue Service (IRS) requires companies to assign inventoriable indirect production costs by a “method of allocation which fairly apportions such costs among the various items produced.” The IRS accepts approaches that involve the use of either overhead rates (which the IRS terms the “manufacturing burden rate method”) or standard costs. Under either approach, U.S. tax reporting requires end-of-period reconciliation between actual and applied indirect costs using the adjusted allocation-rate method or the proration method.* More interestingly, under either approach, the IRS permits the use of practical capacity to calculate budgeted fixed manufacturing cost per unit. Further, the production-volume variance generated this way can be deducted for tax purposes in the year in which the cost is incurred. The tax benefits from this policy are evident from Exhibit 9-7. Note that the operating income when the denominator is set to practical capacity (column D, where the production volume variance of $360,000 is written off to cost of goods sold) is lower than those under normal capacity utilization (column F) or master-budget capacity utilization (column H).