Page 74 - IC26 LIFE INSURANCE FINANCE

The costs of purchase consist of

a) The purchase price

b) Duties and taxes (other than those subsequently recoverable by the enterprise from the taxing

authorities like CENVAT credit)

c) Freight inwards and other expenditure directly attributable to the acquisition.

Trade discounts (but not cash discounts), rebates, duty drawbacks and other similar items are deducted in

determining the costs of purchase.

The costs of conversion include direct costs and systematic allocation of fixed and variable production

overhead.

Allocation of fixed overheads is based on the normal capacity of the production facilities. Normal capacity is

the production, expected to be achieved on an average over a number of periods or seasons under normal

circumstances, taking into account the loss of capacity resulting from planned maintenance.

Under Recovery: Unallocated overheads are recognized as an expense in the period in which they are

incurred.

Example: Normal capacity = 20000 units

Production = 18000 units

Sales = 16000 units

Closing Stock = 2000 units

Fixed Overheads = Rs. 60000/-

Then, Recovery rate = Rs60000/20000 = Rs 3 per unit

Fixed Overheads will be bifurcated into three parts:

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