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CA Intermediate · Cost and Management Accounting · Cost Sheet

Patel Garments has cost of sales Rs 9,00,000 and wants a profit of 20% on sales. Selling price of the whole output is:

When profit is 20% of sales, cost of sales is 80% of the selling price. Dividing Rs 9,00,000 by 0.80 gives sales of Rs 11,25,000. Adding 20% to cost instead, giving Rs 10,80,000, would be a markup on cost, not on sales.

  1. ARs 10,80,000
  2. BRs 11,25,000Correct
  3. CRs 11,00,000
  4. DRs 9,20,000

Explanation

Profit is 20% of sales, so cost is 80% of sales. Sales = 9,00,000 / 0.80 = Rs 11,25,000. Rs 10,80,000 wrongly applies 20% as a markup on cost.

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