Question

Selling price per unit and variable cost per unit are Rs. 8 and Rs. 5 respectively; fixed production overhead for June is Rs. 900; units produced and sold and 600 units and 450 units respectively; nil stock was held at the beginning of June. Which of the following is the difference in production margin reported for June under absorption costing as compared to that under marginal costing?

• A. Rs.450 higher under absorption costing.
• B. Rs. 150 higher under absorption costing.
• C. Rs. 225 higher under absorption costing.
• D. Rs. 300 higher under absorption costing.

Answer 1

The correct option is C Rs. 225 higher under absorption costing.

Solution to the given issue can be presented as:

Under Marginal Costing Under absorption Costing

No. Of Units sold 450 450

Sales @ Rs.8 Per Units Rs.3600 Rs.3600

Variable Cost @ Rs.5 P/U Rs.2250 Rs.2250

Fixed Cost Rs. 900 Rs, 675 *

Profit Rs.450 Rs.675

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* Fixed Cost Rs.900 for 600 units. Proportionate Fixed cost for 450 units Rs.900/600*450 i.e Rs.675.

It is evident that higher profit is reported under absorption costing method by Rs.225.