Ind AS 2 "Inventories" Following information have been provided for A Ltd. which account for its inventories by using FIFO cost formula: Full…

Management should allocate fixed overhead costs and variable overhead costs to units produced at a rate of 0.2 per hour = (1,500 / 7,500) and - 0.4 per hour = (2,600 / 6,500) respectively. Fixed production overhead absorption rate: = Fixed production overhead / Labour hours under normal capacity = 1,500/7,500 = 0.2 per hour Therefore, Fixed production overhead allocated to 6,500 units produced during the year (one unit per hour) = 6,500 units x 0.2 = 1,300. The remaining 200of overhead incurred that remains unallocated is recognized as an expense in the profit and loss. 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 = 2,600 / 6,500 units = 0.4 per hour The above rate results in the allocation of all variable overheads to units produced during the year. As each unit has taken one hour to produce (6,500 hours /6,500 units produced), total fixed and variable production overhead recognized 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 x 1 x (₹ 0.2 +0.4) = 1,380 The remaining - 2,720 {(₹ 1,500 +2,600) -1,380} is recognized as an expense in the Statement of profit and loss as follows: ₹ Absorbed in cost of goods sold (FIFO basis) (6,500 - 2,300) = 4,200 x 0.6 2,520 Unabsorbed fixed overheads, also included in cost of goods sold 200 Total 2,720