Skip to content

CA Intermediate · Advanced Accounting · AS 2 Valuation of Inventory

Gupta Engineering Ltd. manufactures 20,000 units in a year, against normal capacity of 25,000 units. Fixed production overhead for the year is Rs 5,00,000, and variable production overhead is Rs 4 per unit. What is the total production overhead to be absorbed in the cost of the 20,000 units under AS 2?

The overhead absorbed is Rs 4,80,000. Fixed overhead is absorbed on normal capacity at Rs 20 per unit, giving Rs 4,00,000 for 20,000 units, and variable overhead adds Rs 80,000. The unabsorbed fixed overhead is expensed in the period.

  1. ARs 5,80,000
  2. BRs 5,00,000
  3. CRs 4,80,000Correct
  4. DRs 5,30,000

Explanation

Fixed overhead per unit is based on normal capacity: 5,00,000 / 25,000 = Rs 20. For 20,000 units, fixed = Rs 4,00,000. Variable = 20,000 x 4 = Rs 80,000. Total = Rs 4,80,000. Rs 5,80,000 wrongly uses actual output for the fixed rate (5,00,000 + 80,000).

Did you get it right without looking?

One question tells you little. A timed set on AS 2 Valuation of Inventory shows your real accuracy, how long you take and where you lose marks.

Practise AS 2 Valuation of InventoryFree diagnostic mock

More AS 2 Valuation of Inventory questions