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

Verma Industries had opening stock of 3,000 units and closing stock of 1,000 units. Fixed overhead absorption rate is Rs 25 per unit in both years. Marginal costing profit for the year is Rs 4,50,000. The absorption costing profit is:

Absorption costing profit is Rs 4,00,000. Stock decreased by 2,000 units, so Rs 50,000 more fixed overhead is charged under absorption costing than under marginal costing, and profit falls from Rs 4,50,000 by that amount.

  1. ARs 5,00,000
  2. BRs 4,00,000Correct
  3. CRs 4,75,000
  4. DRs 5,25,000

Explanation

Stock fell by 2,000 units. Fixed overhead released from opening stock exceeds that deferred in closing stock by 2,000 x 25 = Rs 50,000, which reduces absorption profit. Absorption profit = 4,50,000 - 50,000 = Rs 4,00,000. Rs 5,00,000 adds the difference, a sign error.

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