CERTYNEX IFRS ACADEMY

Noirmont incurs 400,000 of fixed production overheads. Its normal capacity is 80,000 units, but a prolonged shutdown of a line due to a breakdown limited production to 50,000 units, an abnormally low level. The management controller included all fixed overheads in the cost of the units produced, at 8 per unit. What is the error?

No error: all fixed overheads must be absorbed by actual production.

The rate should have been 5 per unit, computed on normal capacity, and 150,000 of unallocated overheads should have been expensed.

Fixed overheads should have been fully expensed, because only variable overheads are included in inventories when production is abnormally low.

The rate should have been computed on the maximum capacity of the facilities, well above 80,000 units, in order to reduce the unit cost of inventories.