CAF-5 · Chapter 18 · Question 3 of 20
(Marginal/Absorption Costing & Variance Analysis) Budgeted fixed overheads for the year were Rs. 500,000 based on a budgeted capacity of 25,000 units. Actual production was 22,000 units, while actual sales were 20,000 units. The net profit calculated under Marginal Costing was Rs. 350,000. The Fixed Overhead Expenditure Variance was Rs. 15,000 Favourable. What would be the net profit under Absorption Costing?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Rs. 390,000
Explanation
OAR = 500k / 25k = Rs. 20/unit. Change in inventory = Production (22k) - Sales (20k) = +2,000 units. Profit diff = 2,000 * 20 = Rs. 40,000. Since inventory increased, Absorption profit is higher. Absorption Profit = 350k + 40k = Rs. 390,000. (Expenditure variance is a distractor for profit reconciliation).
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