Allocation of Fixed Production Overheads to Determine the Cost of Inventory Under Ind AS 2

Para 12 of Ind AS 2 requires that the costs of conversion of inventories include costs directly related to the units of production, such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings, equipment and right-of-use assets used in the production process, and the cost of factory management and administration.

Also, as per Ind AS 2, the allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities. The amount of fixed overhead allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognised as an expense in the period in which they are incurred. In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased so that inventories are not measured above cost.

The accountant of a company engaged in printing and paper publishing having a normal capacity of printing of 1,00,000 paper is confused in recording the fixed overhead expenditure in the cost of the closing inventory if printing production was: (i) 80,000 units (ii) 1,20,000 units.

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