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CA Intermediate · Advanced Accounting · AS 2 Valuation of Inventory

Ganga Chemicals Ltd. makes one product. Normal capacity is 50,000 units; actual production in the year was 40,000 units. Fixed production overheads were Rs 10,00,000 and variable production overheads Rs 12 per unit. Closing stock is 5,000 units. Under AS 2, what fixed and variable overhead is included in the cost of closing stock?

Closing stock includes Rs 1,00,000 of fixed overhead and Rs 60,000 of variable overhead. Fixed overheads are absorbed on normal capacity (Rs 10,00,000 / 50,000 = Rs 20 per unit), not on lower actual output, so unabsorbed cost is expensed. Variable overhead is Rs 12 x 5,000.

  1. ARs 1,00,000 fixed and Rs 60,000 variableCorrect
  2. BRs 1,25,000 fixed and Rs 60,000 variable
  3. CRs 1,00,000 fixed and Rs 48,000 variable
  4. DRs 1,25,000 fixed and Rs 48,000 variable

Explanation

Fixed overhead is absorbed on normal capacity: 10,00,000 / 50,000 = Rs 20 per unit, so 5,000 x 20 = 1,00,000. Variable is 5,000 x 12 = 60,000. Using actual output gives Rs 25 per unit, i.e. 1,25,000, which wrongly loads unallocated cost to inventory.

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