CMA Intermediate · Cost Accounting · Direct Expenses
Sharma Engineering pays a royalty of Rs 8 per unit produced to a patent holder for a patented process. In a month, 5,000 units were produced and 4,200 units were sold. The royalty on production is a direct expense. What amount of royalty is included in the cost of production for the month?
The royalty included in cost of production is Rs 40,000, because royalty paid on production is a direct expense charged on all 5,000 units produced at Rs 8 each. Using the 4,200 units sold would wrongly give Rs 33,600.
- ARs 33,600
- BRs 40,000Correct
- CRs 8,000
- DRs 6,400
Explanation
Royalty on production is a direct expense chargeable to units produced: 5,000 x Rs 8 = Rs 40,000. Using units sold gives Rs 33,600, which wrongly uses sales quantity as the base.
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