When production is abnormally low because of an unexpected factory shutdown, the unallocated fixed overhead is generally:
Correct answer: B. Recognized as an expense of the period
- A. Added to the cost of each unit produced
- B. Recognized as an expense of the period
- C. Included in trade discount received
- D. Recorded as a reduction in revenue
Explanation
Fixed overhead is allocated using normal capacity, so unusually low production does not cause excessive overhead to be loaded into inventory. The unallocated amount is recognized as a current-period expense.
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About Inventory Valuation
Inventory valuation determines the cost of unsold goods and its effect on cost of sales and profit. The work covers inventory counts, included costs, FIFO and weighted-average costing, and the rule that inventory is reported at the lower of cost and net realisable value, not simply at its expected selling price.
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