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Hi tutor,
The qn states conversion cost includes direct labour costs & allocation of production overheads which are fixed. i know fixed Production overheads includes e.g utilities & rental.
1)Will Fixed production overheads will be recognised as expenses in P/L and into the inventory costs?
2)does variable production costs includes direct material & direct labour cost?Thank you 🙂
“Cost” of inventory for manufactured goods for IAS 2 amount to the same as total absorption cost (assumed knowledge of management accounting):
In management accounting, TAC = variable (marginal) production cost + fixed production cost (“overheads”) on an absorption basis = direct materials + direct labour* + any other direct expense* + production overheads (absorbed)*
Per IAS 2, cost is materials + conversion cost where conversion cost includes the * items.
The cost of a production manager/factory supervisor is a labour cost – but it is not direct – so it is included in production overheads along with other production related costs like machine depreciation.
A risk of material misstatement arises if the total costs included in the calculation of production overhead per unit includes non-production overheads e.g. general/admin fixed costs.
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