CA Inter P4 · Chapter 4 · Question 8 of 11
Fixed production overheads are ₹18,00,000 per annum and normal capacity is 60,000 units. Actual production for the year is only 45,000 units because of low demand. In line with CAS-3, the fixed production overhead to be included in the cost of each unit produced is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) ₹30
Explanation
Fixed production overheads are absorbed on the basis of normal capacity: ₹18,00,000 / 60,000 = ₹30 per unit. Overheads absorbed = 45,000 x ₹30 = ₹13,50,000. The unabsorbed amount of ₹4,50,000, relating to unutilised capacity, is not loaded on to production but charged to the Costing Profit and Loss Account. Spreading all fixed overheads over actual output would give ₹40.00 per unit, overstating cost.
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