IAS 2Chapter 4Lesson 2
Costs of conversion: normal capacity, low production and joint products
Step 1 of 9Learning objectives
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What a plant adds to the cost of materials: direct labour and a systematic allocation of production overheads. Variable overheads follow actual use; fixed overheads are allocated on the basis of normal capacity, so that low production never inflates the cost of inventories: the unallocated part is expensed. When one process delivers several products, the common cost is allocated on a rational and consistent basis.
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Learning objectives
- Identify costs of conversion and distinguish direct costs, fixed production overheads and variable production overheads.
- Calculate the fixed overhead rate based on normal capacity, the share included in inventories and the unallocated part recognised as an expense.
- Adjust the rate when production is abnormally high and explain why low production does not increase it.
- Allocate the cost of a joint production process between products and deal with an immaterial by-product.
- Record the transfer of production to inventories and the low-production expense.