Normal capacity
Normal capacity is expected average production over several periods under normal circumstances, allowing for planned maintenance. Suppose normal output is 1,000 units and fixed production overhead is 10,000: the allocation is normally 10 per unit. If actual output is only 600 units, 6,000 is allocated and the remaining 4,000 is expensed, assuming no other relevant changes. At abnormally high production, reduce fixed overhead per unit to avoid overstating inventory cost.
Worked example
Fixed factory overhead is allocated using normal capacity when actual production is unusually low.
Common mistake
Unallocated overhead from low output is expensed, not loaded onto each unit to inflate inventory.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | F1 | Supporting | July 2027–August 2028 |
| ACCA | F2 | Supporting | July 2027–August 2028 |
| ACCA | FA | Direct | September 2026–June 2027 |
| ACCA | K1 | Supporting | July 2027–August 2028 |
| CIMA | F1 | Direct | Official assessment-window verification pending |
| FIA | FFA | Direct | September 2026–June 2027 |