CA Intermediate · Cost and Management Accounting · Marginal Costing
Pioneer Tools produced 10,000 units and sold 8,000 units in a year at Rs 120 per unit. Variable cost is Rs 70 per unit and fixed production overheads are Rs 2,00,000 (opening stock nil). By how much is profit under absorption costing higher than under marginal costing?
Absorption costing profit is higher by Rs 40,000. Fixed overhead is Rs 20 per unit, and 2,000 unsold units carry Rs 40,000 of fixed cost into closing stock, whereas marginal costing writes off the whole Rs 2,00,000 in the year.
- ARs 40,000Correct
- BRs 20,000
- CRs 50,000
- DRs 1,00,000
Explanation
Fixed overhead per unit = 2,00,000/10,000 = Rs 20. Closing stock = 2,000 units. Fixed cost carried forward in stock under absorption costing = 2,000 x 20 = Rs 40,000. Absorption profit is higher by this amount, as marginal costing charges the full Rs 2,00,000 to the period.
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