I:11-63 Troy Tools manufactures over one hundred different hand tools used by mechanics, carpenters, and plumbers. Troy’s cost accounting system has always been very simple.

The costs allocated to inventory have included only materials, direct labor, and factory overhead. Other overhead costs such as costs of the personnel department, purchasing, payroll, and computer services have never been treated as manufacturing overhead even though many of the activities of the departments relate to the manufacturing operations.

You are preparing Troy’s tax return for the first time and determine that the company is not following the uniform capitalization rules prescribed in the tax law. You have explained to the company’s president that there is a problem, and she is reluctant to change accounting methods. She says allocating these costs to the many products the company makes will be a time-consuming and expensive process. She feels that the cost of determining the additional amounts to include in inventory under the uniform capitalization rules will probably be more than the additional tax that the company will pay. What is the appropriate way to handle this situation? (See the Statements on Standards for Tax Services section in Chapter I:15 for a discussion of these issues.)