ICANManagement InformationAbsorption and Marginal Costing2020

Which of the following statements correctly describes the treatment of fixed production overheads under IAS 2 (Inventories) as adopted in Nigeria through the Financial Reporting Council of Nigeria (FRCN)?

AFixed production overheads must be excluded from inventory valuation and expensed in the period incurred
BFixed production overheads must be included in inventory cost based on normal capacity of production facilitiesCORRECT
CFixed production overheads may be included or excluded from inventory at the discretion of management
DFixed production overheads must be included in inventory cost based on actual production volume only
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Why the answer is B, and why the others tempt you.
IAS 2, as adopted in Nigeria through FRCN pronouncements, requires that fixed production overheads be allocated to inventory based on the normal capacity of production facilities. This is consistent with the absorption costing approach mandated for financial reporting purposes. Using actual production volume exclusively is incorrect because it could distort unit costs when production is abnormally low.
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