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

Under the Cost Accounting Standard on Overheads, how should the cost of an abnormal idle capacity be treated when determining product cost?

Abnormal idle capacity cost is excluded from product cost and charged to the Costing Profit and Loss Account. Only normal idle capacity cost is absorbed in production. Absorbing abnormal cost into units would inflate product cost and distort cost sheets.

  1. ACharged to the Costing Profit and Loss Account and not absorbed in product costCorrect
  2. BAbsorbed in product cost across all units produced in the period
  3. CCarried forward as a deferred asset to future periods
  4. DAllocated to closing stock only

Explanation

Under the overheads standard, cost of abnormal idle capacity arising from unusual causes is not included in product cost and is recognised in the costing profit and loss account. Absorbing it into units would overstate product cost, which is the error in the second option.

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