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CA Intermediate · Cost and Management Accounting · Marginal Costing

Vihaan Traders reports a profit of Rs 90,000 under absorption costing. Opening stock was 400 units and closing stock 700 units. Fixed factory overhead is absorbed at Rs 20 per unit. What is the profit (in Rs) under marginal costing?

Marginal costing profit is Rs 84,000. Stock rose by 300 units, so absorption costing carried forward 300 x Rs 20 = Rs 6,000 of fixed overhead in closing stock. Marginal costing writes this off, so its profit is lower than Rs 90,000 by that amount.

  1. ARs 96,000
  2. BRs 84,000Correct
  3. CRs 90,000
  4. DRs 1,50,000

Explanation

Stock increased by 300 units. Absorption costing defers 300 x Rs 20 = Rs 6,000 of fixed overhead into closing stock, so its profit is higher. Marginal profit = 90,000 - 6,000 = Rs 84,000. Rs 96,000 adds the difference instead of subtracting it.

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