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CMA Intermediate · Management Accounting · Marginal Costing (Management Accounting)

Sharma Components Ltd produced 12,000 units and sold 10,000 units in a year. There was no opening stock. Variable cost is Rs 40 per unit and fixed production overhead is Rs 6,00,000 (absorbed on production). Absorption costing profit exceeds marginal costing profit by:

Absorption profit is higher by Rs 1,00,000. The fixed overhead rate is Rs 50 per unit, and the 2,000 units of closing stock carry Rs 1,00,000 of fixed overhead into the next period instead of charging it to this year's profit.

  1. ARs 1,00,000Correct
  2. BRs 80,000
  3. CRs 1,20,000
  4. DRs 2,00,000

Explanation

Fixed overhead rate = 6,00,000/12,000 = Rs 50 per unit. Closing stock = 12,000 - 10,000 = 2,000 units. Fixed overhead carried forward in stock under absorption costing = 2,000 x 50 = Rs 1,00,000, so absorption profit is higher by that amount. Rs 80,000 wrongly uses variable cost of Rs 40 per unit on the 2,000 units.

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