CA Inter P1 · Chapter 3 · Question 1 of 16
Case: Udaya Castings Ltd has a normal capacity of 50,000 units. During the year it produced 40,000 units. Direct material and labour cost ₹20 per unit, variable production overhead is ₹4 per unit and fixed production overhead is ₹6,00,000. Under AS 2, the cost per unit for valuing closing inventory is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) ₹36
Explanation
AS 2 requires fixed production overheads to be allocated on the basis of normal capacity: 6,00,000 / 50,000 = ₹12 per unit. Cost per unit = 20 + 4 + 12 = ₹36. The unallocated overhead of 10,000 x 12 = ₹1,20,000 is expensed in the period. Allocating on actual production (₹15 per unit) would overstate inventory.
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