Fixed production overheads
Fixed production overheads are indirect production costs that remain relatively constant despite changes in output, such as factory rent and factory management salaries. Inventory cost includes an allocation based on normal production capacity. Low output does not justify inflating the per-unit allocation: unallocated overhead is expensed. Abnormally high output requires reducing the per-unit allocation to avoid measuring inventory above cost.
Worked example
Normal capacity is 10,000 units and fixed factory overhead is $100,000: allocate $10 per unit; if only 8,000 units are made, $20,000 remains unallocated.
Common mistake
Selling costs, general administration unrelated to production and abnormal waste are not included just because they are fixed costs.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | F1 | Supporting | July 2027–August 2028 |
| ACCA | F2 | Direct | July 2027–August 2028 |
| ACCA | F3 | Direct | July 2027–August 2028 |
| ACCA | FA | Direct | September 2026–June 2027 |
| ACCA | K1 | Direct | July 2027–August 2028 |
| CIMA | BA2 | Direct | Official assessment-window verification pending |
| CIMA | F1 | Direct | Official assessment-window verification pending |
| FIA | FFA | Direct | September 2026–June 2027 |