CAF-5 · Chapter 17 · Question 4 of 20
(Marginal vs. Absorption Costing & Inventory Flow) A manufacturing firm has no opening inventory. During the year, it produced 10,000 units and sold 8,000 units. The variable production cost is Rs. 50 per unit, and total fixed production overheads are Rs. 200,000. If the net profit calculated under the marginal costing system is Rs. 150,000, what would be the net profit under an absorption costing system?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Rs. 190,000
Explanation
Fixed Overhead Absorption Rate (OAR) = Rs. 200,000 / 10,000 units = Rs. 20 per unit. Inventory change = Production (10,000) - Sales (8,000) = +2,000 units. Difference in profit = Change in inventory * OAR = 2,000 * Rs. 20 = Rs. 40,000. Because production > sales, Absorption Profit is higher. Absorption Profit = Marginal Profit (150,000) + 40,000 = Rs. 190,000.
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