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02 October 2015 Dear expert , While calculating the cost of conversion in inventory valuation, fixed overheads are valued on normal basis even when actual output is less than normal capacity . Why not on actual basis ??? Whereas in case where actual production is greater than the normal capacity , the fixed overheads are valued on actual basis ... please explain .

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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02 October 2015 Fixed overheads are fixed for the particular level of production capacity. example if your production capacity 100 units mean but you are actual production is 50 only, even then fixed overheads are need to be incurred for the 100 actual capacity of 100 units only. so when the production is less than the capacity you need to calculate the fixed overhead as normal basis. but when the production is greater than the actual/installed capacity then additional overheads may be incurred hence the overheads are taken actual basis.exmaple. if you are machinery has capacity to produce 100 units only for the particular period,but that period you prodcue 150 units means actually you might have incurred some other additional cost hence we are taking actual cost

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