CAF-5 · Chapter 9 · Question 6 of 10
A company had an opening inventory of 4,000 units and a closing inventory of 6,000 units. The fixed overhead absorption rate (OAR) is Rs. 15 per unit. If the net profit calculated under marginal costing is Rs. 120,000, what will be the net profit under absorption costing?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Rs. 150,000
Explanation
The difference in profit is calculated by the change in inventory units multiplied by the fixed OAR. Change in inventory = Closing (6,000) - Opening (4,000) = +2,000 units. Profit Difference = 2,000 units × Rs. 15 = Rs. 30,000. Since inventory increased (Production > Sales), Absorption Profit is higher. Absorption Profit = Marginal Profit (120,000) + Difference (30,000) = Rs. 150,000.
More Marginal Costing and Absorption Costing MCQs
- Q8Which of the following situations will require an adjustment for "under or over-absorbed overheads" in the income statement?
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- Q1What is the fundamental difference between marginal costing and absorption costing?
- Q2Under a marginal costing system, how are fixed production overheads treated in the financial period they are incurred?