CFA Level I · CFA Level I Exam · Analysis of Inventories
A manufacturer's normal capacity is 100,000 units per year, with fixed production overhead of 400,000. In the current year it produced 80,000 units because of weak demand. Under IFRS, the fixed overhead allocated to each unit of inventory is closest to:
The allocation is 4.00 per unit, found by dividing 400,000 of fixed overhead by normal capacity of 100,000 units. Using the lower actual output of 80,000 units would give 5.00, but IFRS does not allow inflating inventory cost for abnormally low production; unallocated overhead is expensed.
- A4.00Correct
- B5.00
- C4.50
Explanation
Fixed overhead is allocated using normal capacity: 400,000 / 100,000 = 4.00 per unit. Using actual output would give 5.00, which is wrong because it inflates inventory cost during low production. The unallocated 80,000 x... (20,000 x 4 = 80,000) is expensed.
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