The following information is gathered from an entity: Full capacity is 10,000 labour hours in a year.Normal capacity is 7,500 labour hours in a…

Hours taken to produce 1 unit = 6,500 hours / 6,500 units = 1 hour per unit. Fixed production overhead absorption rate: = Fixed production overhead / labour hours for normal capacity = 1,500 / 7,500 = 0.2 per hour Management should allocate fixed overhead costs to units produced at a rate of 0.2 per hour. Therefore, fixed production overhead allocated to 6,500 units produced during the year (one unit per hour) = 6,500 units x1 hour x 0.2 = 1,300. The remaining fixed overhead incurred during the year of 200 (₹ 1,500 - 1,300) that remains unallocated is recognized as an expense. 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 hours = 0.4 per hour Management should allocate variable overhead costs to units produced at a rate of 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 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 units x 1 hour x (₹ 0.2 +0.4) = 1,380 The remaining - 2,720 [(₹ 1,500 +2,600) - 1,380] is recognized as an expense in the income statement as follows: Particulars ₹ Absorbed in cost of goods sold (FIFO basis) (6,500 – 2,300) = 4,200 x 0.6 2,520 Unabsorbed fixed overheads, not included in the cost of goods sold 200 Total 2,720