What it is
Inventory cost includes a share of production overhead, and the share is set by a predetermined rate on normal capacity. When production falls short of normal capacity, the unabsorbed fixed overhead is a period cost, not an inventory cost. This workbook applies the rule and shows what it does to ending inventory and cost of goods sold.
Enter budgeted fixed and variable overhead, normal capacity and actual overhead and driver units. The workbook calculates the rate, the overhead applied, the under- or over-applied amount, the idle capacity charge and the allocation of the remainder, then rolls up unit cost for each product and splits production between ending inventory and cost of goods sold.
When to use it
- At year end, to support the overhead included in inventory.
- When volume drops and the audit team asks whether idle capacity was capitalized.
- When building or reviewing product costs for a new product line.
What’s inside
- Pools tab: rates, applied overhead, under or over-applied amount, capacity utilization and the capacity test
- Allocation of the remainder between ending inventory and cost of goods sold
- Products tab: 25 products with unit cost, ending inventory at cost and cost of goods sold
- Checks that driver units agree and that the allocation ties to the variance
Standard cited
This template follows ASC 330. It is written in our own words, except for phrases the standard requires the document to contain, with [bracketed placeholders] for client details, amounts in USD and dates as MM/DD/YYYY. Check it against the current standard and your firm’s methodology before use.
Questions
Why does fixed overhead use normal capacity?
Allocating fixed overhead on actual low volume would load too much cost on each unit and carry the cost of idle capacity in inventory. The guidance allocates on normal capacity and expenses the unallocated amount in the period.
What if production is above normal capacity?
The same rate applies, and overhead is over-applied. The over-applied amount reduces the cost of inventory and cost of goods sold through the allocation, so inventory does not carry more than actual cost.
Does the workbook handle opening inventory?
It does not carry opening inventory. If units sold exceed units produced, a flag shows it. Add opening inventory as a separate row with its own unit cost.
Related templates
- Manufacturing Standard Cost Variance Analysis
- Manufacturing Inventory and Cost Accounting Audit Checklist
- Lower of Cost or NRV Inventory Test (ASC 330)
- Audit Program: Inventory
Last updated 11/05/2026. All free templates.