The allocation of fixed overheads to cost of sales
ID:CVAFO

Video Overview

In a manufacturing entity cost of sales is calculated as follows. First we calculate the direct materials that were issued to the factory, add direct labour and factory overheads. This gives us the total production costs that were issued to work-in-progress for the year. Any partially completed units or costs in the factory left over from the previous period is then added to the current periods production cost, this being the opening balance of work-in-progress. Any partially completed units in the factory at the period end are then subtracted from the production costs, being the closing balance of work-in-progress. This then gives us the cost of production of finished goods for the period. This amount is transferred out of work-in-progress to finished goods. Any unsold finished goods from the previous period are then added to this figure, being the opening balance of finished goods and any unsold finished goods at the end of the current period are then subtracted from this figure, being the closing balance of finished goods. This then gives us cost of sales for the current period. In this tutorial we are going to specifically look at how fixed overheads are allocated to costs of sales from finished goods, and how any under allocation of fixed overheads or over allocation of fixed overheads are then either added to or subtracted from cost of sales respectively.