Fixed manufacturing overhead at normal capacity under VAS 02: expensing unabsorbed cost to COGS in ERP
Written by the S4 Consulting Oracle NetSuite team · Reviewed by Lạc Phạm, Solution Architect, S4 Consulting · Updated 28 Oct 2026
Fixed manufacturing overhead may be included in product cost only at the normal capacity of the production facilities; when actual output falls short, the unallocated portion is recognized as an expense of the period, which in Vietnam is booked to cost of goods sold, account 632. The rule comes from Vietnamese Accounting Standard 02 Inventories (VAS 02) and mirrors the logic of IAS 2. It is also one of the adjustments Vietnamese finance teams most often handle in spreadsheets when they run a global ERP. This article explains the rule, works through an absorption example and shows how S4 eSuite VN Actual Costing automates it on Oracle NetSuite.
What does VAS 02 say about fixed manufacturing overhead and normal capacity?
VAS 02 requires fixed overhead to be allocated to conversion cost on the basis of normal capacity, not on low actual output. Under the standard, the cost of finished goods comprises direct materials, direct labor and manufacturing overhead. Fixed overhead covers indirect costs that do not move with volume, such as depreciation and maintenance of plant and equipment and the cost of running the production floor. Normal capacity is the output expected on average under normal operating conditions.
When actual output is below normal capacity, fixed overhead is allocated only up to normal capacity and the remainder is expensed in the period. Guidance on account 154 under Circular 99/2025/TT-BTC also states that unallocated fixed overhead is not part of product cost and goes to 632. The economics are simple: the cost of idle capacity reflects inefficiency, not value created in the product, so it should not be parked in inventory and released in a later period.
How do you separate variable and fixed overhead in the ledger?
The practical route is to split them at the account, department or class level and collect each in its own pool. Variable overhead moves roughly with volume and is always allocated in full to the period’s output. Fixed overhead first passes through an absorption step. Typical examples:
- Usually fixed: depreciation of machines and buildings, factory rent, production supervisors’ salaries, scheduled maintenance, asset insurance.
- Usually variable: machine power consumption, indirect materials, compressed air, fuel, piece-rate subcontracting.
- Needs analysis: electricity with a capacity charge and a usage charge, and wages with a base component and a piece-rate component.
In S4-APC, each cost pool selects its source accounts, can be filtered by department, class or location, and is flagged as variable or fixed. Fixed pools automatically go through the normal capacity calculation. Costs shared across plants, such as a site-wide power bill, are split by declared percentages, and the system checks that the shares add up to the whole.
Worked example: how much goes to 632 in a low-volume month?
The absorption rate equals actual output divided by normal capacity; fixed overhead absorbed into product cost equals total fixed overhead times that rate, and the rest goes to 632. Illustrative example: a line carries VND 100,000,000 of depreciation per month and a normal capacity of 10,000 units per month.
| Month | Actual output | Absorption rate | Absorbed into cost (VND) | Expensed to 632 (VND) | Fixed cost per unit (VND) |
|---|---|---|---|---|---|
| Month A | 9,000 | 90% | 90,000,000 | 10,000,000 | 10,000 |
| Month B | 6,000 | 60% | 60,000,000 | 40,000,000 | 10,000 |
| Month C | 1,500 | 15% | 15,000,000 | 85,000,000 | 10,000 |
Fixed cost per unit stays at VND 10,000 (100,000,000 / 10,000) whatever the volume. If all VND 100,000,000 were pushed into Month C’s output, fixed cost per unit would be VND 66,667 (100,000,000 / 1,500), more than six times the normal level, purely because the order book was thin.
Why is capitalizing all fixed overhead into inventory a problem?
It departs from the standard and distorts decisions. When a low-volume month still absorbs every dong of fixed cost, closing inventory is overstated and the month’s loss is deferred to the next period, exactly when the business is short of orders. Sales teams see unit cost jump and may raise quotes, losing more volume. At audit, unabsorbed overhead sitting in stock is a frequent proposed adjustment.
Expensing the unabsorbed portion to 632 gives management one clear figure: the cost of idle capacity in the month. That is far more useful than an inflated unit cost, because it points to an operational question (how to fill the line) rather than a pricing one.
Expense idle capacity the VAS 02 way, inside NetSuite
Set normal capacity by plant, calculate the absorption rate automatically and post unabsorbed fixed overhead to 632 with approval and audit trail.
Explore S4 eSuite VN Actual Costing →Download the PDF brochure
How is normal capacity set for each plant in NetSuite?
In S4-APC, normal capacity is defined on the Costing Unit, which represents a plant or workshop, with a unit of measure suited to that plant. A Costing Unit can span several locations, and configuration is held per subsidiary. Every configuration has start and end dates, so when the plant adds a machine and raises capacity from next month, Finance creates a new version and locked periods stay untouched.
Because normal capacity drives the 632 figure directly, changes require approval and a pending record has no effect until approved. Each costing run stores a snapshot of the configuration it used, so when auditors ask which capacity was applied in March, the answer is on file. When choosing the number, use average output under normal conditions, allowing for planned maintenance, rather than the nameplate maximum.
Can an approver include an abnormal amount in product cost?
By default, S4-APC expenses unabsorbed fixed overhead to 632. There are cases where the chief accountant judges that a shortfall does not reflect inefficiency, for example a month with fewer working days because of a planned public holiday. The approver can then accept the amount into product cost. Each acceptance is recorded with the reason and the approver, leaving a clear audit trail instead of an unnamed spreadsheet adjustment.
Which reports show management the cost of idle capacity?
The capacity utilization report shows how much of normal capacity each plant used and the matching unabsorbed fixed cost. The costing dashboard displays cost indicators by plant, unit cost trends across periods and the list of tasks to clear before close. Together with the period-to-period cost variance bridge, management can separate cost increases driven by input prices from those caused by low volume.
Fixed overhead is one of three adjustments VAS 02 expects outside product cost or at period end; the others are abnormal material loss and ending WIP measurement, which splits cost correctly between finished goods and work in progress. The wider picture is covered in actual manufacturing cost on NetSuite, and all 18 reports are listed on the S4 eSuite VN Actual Costing page.
Frequently asked questions
What is fixed manufacturing overhead?
Indirect production costs that do not change with volume, such as depreciation of machines and buildings, maintenance and the cost of running the production floor.
How does VAS 02 define normal capacity?
Normal capacity is the output expected on average under normal operating conditions, not the nameplate maximum of the equipment.
Where does unallocated fixed overhead go?
When actual output is below normal capacity, the unallocated portion is expensed in the period, booked to cost of goods sold, account 632.
How is the absorption rate calculated?
Actual output divided by normal capacity. For example, 1,500 units against a normal capacity of 10,000 gives 15%.
Do changes to normal capacity in S4-APC need approval?
Yes. Normal capacity is a key parameter, so changes require approval and carry effective dates; locked periods are not affected.
