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CMA Final · Cost and Management Audit · Overview of Cost Accounting Standards and GACAP

Under CAS 3 (Production and Operation Overheads), how should the cost of abnormal idle capacity be treated?

Abnormal idle capacity cost is excluded from the cost of production under CAS 3. It is recognised separately and charged to the costing profit and loss account, because abnormal losses are not a normal cost of making the product and should not inflate unit cost or inventory valuation.

  1. AIt is not included in the cost of production and is treated as a separate abnormal cost charged to costing profit and lossCorrect
  2. BIt is absorbed into the cost of production of the units actually produced
  3. CIt is added to the closing stock value
  4. DIt is spread over opening and closing inventories equally

Explanation

Under the standards, costs arising from abnormal situations such as abnormal idle capacity are not part of normal production cost. They are shown separately and charged to the costing profit and loss account. Absorbing them into units would overstate product cost and inventory, which is why that option is wrong.

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