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

Mehta Industries had opening stock nil. It produced 10,000 units and sold 8,000 units. Variable cost is Rs. 20 per unit and total fixed factory overhead is Rs. 50,000. Under absorption costing the profit is higher than under marginal costing by:

Absorption costing profit is higher by Rs. 10,000. Fixed overhead per unit is Rs. 5 (50,000 over 10,000 units produced). The 2,000 unsold units carry Rs. 10,000 of fixed cost into closing stock under absorption costing, whereas marginal costing writes it all off in the period.

  1. ARs. 10,000Correct
  2. BRs. 16,000
  3. CRs. 12,500
  4. DRs. 50,000

Explanation

Fixed overhead per unit = 50,000/10,000 = Rs. 5. Closing stock is 2,000 units, so absorption costing carries forward 2,000 x 5 = Rs. 10,000 of fixed cost in stock. Hence absorption profit is higher by Rs. 10,000. Rs. 12,500 wrongly divides by 8,000 units sold.

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