Dear all

Can someone tell me how do you define normal capacity of IAS 2?

In IAS 2, it said that normal capacity is the production expected to
be achieved on average over a number of periods or seasons under
normal circumstances.

I am wondering how to caculate the normail capacity?

ex: one machine can produce 10 finish good in 8 hours, then, the
factory works 8 hours per days and five days per week, so the normal
capacity will be

10 *8*4=320 ?

or the enterprise estimate that they can sell 250 finish goods per
months in normal circumstances. so, the enterprise estimate that they
need to produce 300 finish goods per month. then, 300 should be the
normal capacity?

In addition, under this terrible financial crisis, can we use the same
capacity to allocate overhead expense. In this financial crisis , many
companys just work 2 or 3 days to less their loss. Under IAS 2, these
companys will need to record a lot of expense if they still use the
same capacity to allocate they expense. can some one tell me will u
just use the same capacity to do it? or you will use new capacity to
allocate these expense?

I really confused about it

please send me some information?

Thank in advance.


Hello,

Your question is about fixed overheads only as variable overheads goes
in line with production output volumes.

To my understanding of IAS 2 the normal capacity results from average
expected production output over a number of months (full cycle of
seasons, 12 months year, ect.). Just to underline this is not a sales
volume. First of all you need to take into account maintenance period
with no output. Furtheremore normal capacity can be based on
historical output if close to normal capacity. So if you work now just
2 days/week (and 7 days/week before) the normal production capacity
should be based on 7 days production. Unallocated fixed overheads
should be recognised in P&L in the period when incurred. In the result
amount of unallocated fixed overheads should not increase stock value
becasue of idle plant.

I would also like to draw your attention to other part of IAS 2, where
we need to write down stock value to NRV. You may find even you
allocate all fixed overheads to stock in times of low production you
need to write it down becase of NRV requriments. This is especially
true in industries with low margins.

Please also note the IAS 36 and need for impairment review of your
asset when idle. I may be applicable to some of your plant when
working just 2 days/week. Depreciation is a fixed overhead, so it also
concerns your stock valuation.

Regards,
Jakub