CA Intermediate · Cost and Management Accounting · Marginal Costing
Dhruv Appliances produced 12,000 units and sold 10,000 units in a year. Selling price is Rs 100 per unit, variable cost is Rs 60 per unit and fixed factory overhead is Rs 2,40,000. There was no opening stock. Under absorption costing, fixed overhead is absorbed on units produced. By how much does absorption costing profit exceed marginal costing profit?
Absorption costing profit exceeds marginal costing profit by Rs 40,000. Fixed overhead is Rs 20 per unit produced, and 2,000 unsold units carry Rs 40,000 of fixed cost into closing stock under absorption costing, whereas marginal costing charges all fixed cost to the current period.
- ARs 40,000Correct
- BRs 20,000
- CRs 48,000
- DRs 2,40,000
Explanation
Fixed overhead per unit = 2,40,000/12,000 = Rs 20. Closing stock = 2,000 units, so fixed overhead carried forward = 2,000 x 20 = Rs 40,000. Absorption profit is higher by this amount because marginal costing writes off the whole fixed cost. Rs 20,000 wrongly uses 1,000 units.
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