4. Fixed Overhead Allocated to Inventory Tri-Axis Corporation manufactures aircr

Question

4. Fixed Overhead Allocated to Inventory Tri-Axis Corporation manufactures aircraft components. Over the past year, demand for Tri-Axis’s products has experienced an abnormal decline. This led to a temporary decrease in production at the Tri-Axis facility while xed overhead costs have remained unchanged. The CFO of Tri-Axis has asked you to determine whether the xed overhead cost allocated to each unit of inventory should be increased as a result of this decrease in production. Prepare a memo detailing appropriate treatment of this issue and citing specic paragraph numbers

Explanation / Answer

Fixed over head should be allocated based on Actual production or Normal Capacity Production which ever is higher.

Hence the xed overhead cost allocated to each unit of inventory should not be increased as a result of this decrease in production.

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