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CMA Foundation · Fundamentals of Financial and Cost Accounting · Application of Cost Accounting for Business Decisions

Kaveri Ltd produced 10,000 units and sold 8,000 units in a period. Selling price is ₹60, variable cost ₹35 per unit, and fixed production overhead is ₹1,00,000. There was no opening stock. By how much does profit under absorption costing exceed profit under marginal costing?

Absorption costing profit is higher by ₹20,000. Fixed overhead is ₹10 per unit on 10,000 units produced, and 2,000 unsold units carry ₹20,000 of it into closing stock, whereas marginal costing charges the whole ₹1,00,000 to the period.

  1. A₹25,000
  2. B₹20,000Correct
  3. C₹50,000
  4. D₹10,000

Explanation

Fixed overhead per unit = 1,00,000 / 10,000 = ₹10. Closing stock is 2,000 units, so fixed overhead carried forward in absorption costing = 2,000 x 10 = ₹20,000. Absorption profit is higher by this amount. ₹25,000 wrongly uses the variable cost per unit.

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