Capitalized inventory cost

CFA Level I FRA
#1

Hello

the question is " the production facility was operating at 75% of capacity and the fixed production overhead cost is 3 million, how much the fixed production overhead cost should capitalized to the inventory cost"

the correct answer is 3*75%=2.25

why it is not just 3? Let say the full capacity is 100. Now it operate at 75 units. It only the per unit cost changes, the total overhead cost to produce the 75 units is still 3 million. Why it need to times 75%? If so, where should the other 25% go?

thanks

#2

If facilty operates with 75 % of its capacity than only 75 % fixed production costs are directly related to inventory production thus satisfy condition to be capitalized. Rest of 25 % costs are expensed in period because are not directly related to inventories. I would conclude in this manner. Otherwise those questions with inventories not only in CFA exam are very inspirative because the accounting area related to inventories is most common subject to creative accounting approach. I had chances to convince in this.

#3

Thanks for reply. This question is old monk exam Question. According to what you say, the fixed overhead cost which capaterlized in inventory should be all based on full capacity?

#4

Hey is my understanding correct? The fixed overhead cost include various of cost, among these cost, only 75% of the cost is associated with the production

#5

Exactly. Each production has its direct and indirect costs. Beside costs of direct labour and material spent in process which are directly capitalized, there are also part of fixed overhead costs which are assigned to production and are capitalized. Those fixed costs are ussualy deployed to production by some method (one of most common method is ABC - Activity based costing). All capitalized costs (direct one and indirect (overhead) directly increase purchasing (production) price of each product.