Page 4 - 7. COMPILER QB - INDAS 2

The amount of fixed overhead allocated to inventory is not increased as a result of low production by using

normal capacity to allocate fixed overhead.

Variable production overhead absorption rate:
= Variable production overhead/actual hours for current period

= Rs 2,600 / 6,500 hours = Rs 0.4 per hour

Management should allocate variable overhead costs to units produced at a rate of Rs 0.4 per hour.
The above rate results in the allocation of all variable overheads to units produced during the year.

Closing inventory = Opening inventory + Units produced during year – Units sold during year

= 2,500 + 6,500 – 6,700 = 2,300 units

As each unit has taken one hour to produce (6,500 hours / 6,500 units produced), total fixed and variable
production overhead recognised as part of cost of inventory:

= Number of units of closing inventory x Number of hours to produce each unit x (Fixed production
overhead absorption rate + Variable production overhead absorption rate)

= 2,300 units x 1hour x (Rs 0.2 + Rs 0.4) = Rs. 1,380

The remaining Rs 2,720 [(Rs 1,500 + Rs 2,600) – Rs. 1,380] is recognised as an expense in the income

statement as follows:
Particulars Rs.
Absorbed in cost of goods sold (FIFO basis)

(6,500 – 2,300) = 4,200 x Rs 0.6 2,520

Unabsorbed fixed overheads, not included
in the cost of goods sold 200

Total 2,720

Q3 (Nov. 20)

A company normally produced 1,00,000 units of high precision equipment each year over the past several years.
In the current year, due to lack of demand and competition, it produced only 50,000 units. Further information
is as follows:

Material = Rs. 200 per unit;

Labour = Rs. 100 per unit;
Variable manufacturing overhead = Rs. 100 per unit;

Fixed factory production overhead = Rs. 1,00,00,000;
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