This chapter-wise practice test covers Chapter 14: Marginal Costing - Test 5 for CA Intermediate Group 2 students preparing for the January 2027 examination attempt. It carries 50 marks across 25 questions in case scenarios and standalone practical MCQs with a time limit of 60 minutes and no negative marking.
25 questions across 1 chapter, 50 marks and 60 minutes in the timed paper. Every answer below is shown with the working behind it and the authority it rests on.
Law and standards used: ICAI Study Material for CA Intermediate Paper 4: Cost and Management Accounting (relevant for 2027 attempt).
Questions
25
Marks
50
Time limit
60 minutes
Attempt
January 2027
Group
Group 2
Law basis
ICAI Study Material for CA Intermediate Paper 4: Cost and Management Accounting (relevant for 2027 attempt)
Content as of
2026-11-10
Chapters covered
Chapter 14: Marginal Costing (25 Q)
Questions, answers and explanations
Question 1 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. Vikram Precision Engineering Ltd. manufactures specialised hydraulic components for industrial machinery manufacturers. The company uses marginal costing for internal performance analysis but prepares its annual financial statements under absorption costing. Management wants to understand the effect of inventory movements on the profits reported under the two costing techniques for the quarter ended December 2026.
The following information is available:
| Particulars | Amount |
| Selling price per unit | ₹150 |
| Variable manufacturing cost per unit | ₹80 |
| Variable selling cost per unit | ₹5 |
| Annual normal production capacity | 15,000 units |
| Actual quarterly production | 12,000 units |
| Actual quarterly sales | 10,000 units |
| Fixed manufacturing overhead for the quarter | ₹2,88,000 |
| Fixed administration and selling expenses | ₹1,20,000 |
The company had no opening inventory at the beginning of the quarter. All manufacturing overheads were absorbed at the predetermined rate based on normal production capacity. Actual fixed manufacturing overhead is equal to the amount absorbed during the quarter, and there is no under-absorption or over-absorption. Fixed administration and selling expenses are period costs under both techniques. Variable selling expenses are incurred only on units sold and are not included in inventory valuation.
Production operations require 1.5 machine hours per unit. Available machine capacity is 20,000 hours for the quarter. Direct labour costs are included in the variable manufacturing cost, and normal production wastage is already reflected in the standard cost per saleable unit. All production is saleable, and the closing inventory consists entirely of finished goods. There are no abnormal losses, interdepartmental transfers or work-in-progress balances. Management requires a comparison of closing inventory valuation and quarterly profit under both methods, particularly the impact of fixed manufacturing overhead retained in unsold finished goods.
What is the value of closing finished-goods inventory under absorption costing and marginal costing, respectively?
₹2,08,000 and ₹1,60,000 (correct answer)
₹1,60,000 and ₹2,08,000
₹2,40,000 and ₹1,92,000
₹1,20,000 and ₹1,00,000
Answer: A — ₹2,08,000 and ₹1,60,000
Explanation. Fixed manufacturing overhead rate = ₹2,88,000 ÷ 12,000 = ₹24 per unit. Absorption cost per unit = ₹80 + ₹24 = ₹104. Closing stock = 12,000 − 10,000 = 2,000 units. Absorption inventory = 2,000 × ₹104 = ₹2,08,000. Marginal inventory = 2,000 × ₹80 = ₹1,60,000. The difference is ₹48,000, representing fixed manufacturing overhead carried forward in closing inventory.
Where it goes wrong. Including fixed manufacturing overhead in marginal-cost inventory valuation or excluding it from absorption-cost inventory valuation.
Question 2 · 2 marks · Chapter 14: Marginal Costing · hard
By how much will absorption costing profit exceed marginal costing profit for the quarter?
₹24,000
₹48,000 (correct answer)
₹72,000
₹96,000
Answer: B — ₹48,000
Explanation. Production exceeds sales by 2,000 units, creating closing inventory of 2,000 units. Fixed manufacturing overhead per unit = ₹2,88,000 ÷ 12,000 = ₹24. The fixed overhead included in closing stock is 2,000 × ₹24 = ₹48,000. With no opening inventory, absorption costing profit is higher by ₹48,000 because this portion of fixed manufacturing overhead is carried forward rather than charged fully to the current period. Option c incorrectly includes another fixed-cost component.
Where it goes wrong. Comparing total inventory values instead of comparing only the fixed manufacturing overhead component.
Question 3 · 2 marks · Chapter 14: Marginal Costing · medium
Calculate the quarterly profit under marginal costing.
₹1,94,000
₹2,90,000
₹2,42,000 (correct answer)
₹3,38,000
Answer: C — ₹2,42,000
Explanation. Sales = 10,000 × ₹150 = ₹15,00,000. Variable manufacturing cost of units sold = 10,000 × ₹80 = ₹8,00,000. Variable selling expense = 10,000 × ₹5 = ₹50,000. Contribution = ₹6,50,000. Deduct fixed manufacturing overhead of ₹2,88,000 and fixed administration and selling expenses of ₹1,20,000. Marginal costing profit = ₹2,42,000. Fixed manufacturing overhead is charged fully as a period cost.
Where it goes wrong. Charging only the fixed manufacturing overhead relating to units sold instead of the entire current-period fixed manufacturing expenditure.
Question 4 · 2 marks · Chapter 14: Marginal Costing · hard
What is the quarterly profit under absorption costing after including the fixed manufacturing overhead in inventory valuation?
₹2,42,000
₹2,66,000
₹3,38,000
₹2,90,000 (correct answer)
Answer: D — ₹2,90,000
Explanation. Marginal costing profit is ₹2,42,000. Fixed manufacturing overhead deferred in closing inventory = 2,000 units × ₹24 = ₹48,000. Therefore, absorption costing profit = ₹2,42,000 + ₹48,000 = ₹2,90,000. Alternatively, absorption cost of goods sold is 10,000 × ₹104 = ₹10,40,000; deduct this, variable selling expenses of ₹50,000 and fixed period expenses of ₹1,20,000 from sales of ₹15,00,000 to obtain ₹2,90,000.
Where it goes wrong. Failing to defer the fixed manufacturing overhead included in closing inventory.
Question 5 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. Apex Industrial Appliances Ltd. manufactures commercial refrigeration equipment. The company maintains finished-goods inventory to meet seasonal demand. Its costing department is preparing a comparative profitability statement for the year ended March 2027. The company applies FIFO for inventory issues, and opening inventory was produced in the preceding year when the fixed manufacturing overhead absorption rate was different from the current year's rate.
The following particulars are available:
| Particulars | Amount |
| Opening finished goods inventory | 3,000 units |
| Current-year production | 9,000 units |
| Current-year sales | 10,500 units |
| Selling price per unit | ₹180 |
| Variable manufacturing cost per unit | ₹70 |
| Variable selling and distribution cost per unit | ₹8 |
| Current-year fixed manufacturing overhead | ₹1,80,000 |
| Current-year fixed administration and selling overhead | ₹90,000 |
| Previous-year fixed manufacturing overhead per unit in opening stock | ₹18 |
| Current-year fixed manufacturing overhead absorption rate | ₹20 |
The opening finished goods inventory was valued at ₹70 variable manufacturing cost plus ₹18 fixed manufacturing overhead per unit. Current production costs are incurred uniformly, and the actual fixed manufacturing overhead equals the amount absorbed at the current predetermined rate. There is no under-absorption or over-absorption in the current year. Under FIFO, opening inventory is issued before current-year production, leaving closing inventory entirely from current-year production.
The company has no work-in-progress or abnormal production losses. Variable selling costs arise only when products are sold and are excluded from closing stock valuation. Fixed administration and selling expenses are charged to the current year's profit and loss account in full. Management is required to prepare profits under marginal and absorption costing and explain why the two methods produce different results when opening and closing inventory contain different amounts of fixed manufacturing overhead. No change in accounting policies or inventory quantities is proposed during the next reporting period.
What is the fixed manufacturing overhead component released from opening inventory into current-year cost of goods sold?
₹54,000 (correct answer)
₹30,000
₹60,000
₹24,000
Answer: A — ₹54,000
Explanation. Opening finished goods inventory contains 3,000 units. The fixed manufacturing overhead component in each opening unit is ₹18, representing the preceding year's absorption rate. Therefore, fixed overhead released from opening inventory = 3,000 × ₹18 = ₹54,000. The current-year absorption rate of ₹20 applies to current production and closing inventory, not to the opening inventory valuation. Option b represents the closing inventory fixed overhead component.
Where it goes wrong. Applying the current-year fixed overhead rate to opening inventory instead of using the rate embedded in its previous-period valuation.
Question 7 · 2 marks · Chapter 14: Marginal Costing · medium
Calculate the annual profit under marginal costing.
₹7,77,000
₹8,25,000
₹8,01,000 (correct answer)
₹8,55,000
Answer: C — ₹8,01,000
Explanation. Sales revenue = 10,500 × ₹180 = ₹18,90,000. Under FIFO, variable production cost of goods sold = (3,000 + 7,500) × ₹70 = ₹7,35,000. Variable selling expense = 10,500 × ₹8 = ₹84,000. Contribution = ₹10,71,000. Deduct current fixed manufacturing overhead of ₹1,80,000 and fixed administration and selling expenses of ₹90,000. Marginal costing profit = ₹8,01,000.
Where it goes wrong. Including fixed manufacturing overhead in marginal-cost inventory valuation or omitting variable selling expenses from the contribution calculation.
Question 9 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. Zenith Manufacturing Systems Ltd. produces industrial electrical control panels at its Pune facility. The company has introduced a revised overhead absorption system and is comparing its quarterly financial performance under marginal costing and absorption costing. The costing department has been instructed to identify the effect of fixed manufacturing overhead recovery and the treatment of unsold finished goods.
The relevant quarterly information is:
| Particulars | Amount |
| Budgeted normal production | 12,000 units |
| Actual production | 12,000 units |
| Actual sales | 12,000 units |
| Selling price per unit | ₹240 |
| Variable manufacturing cost per unit | ₹130 |
| Variable selling cost per unit | ₹10 |
| Budgeted fixed manufacturing overhead | ₹3,60,000 |
| Actual fixed manufacturing overhead | ₹3,72,000 |
| Fixed administration and selling expenses | ₹1,80,000 |
Fixed manufacturing overhead is absorbed using a predetermined rate based on normal production capacity. Actual fixed manufacturing expenses are higher than the budgeted amount, and the resulting under-absorption is transferred to the current period's profit and loss account. The company has no opening or closing inventory, and all units produced are sold. Variable selling expenses are charged only on sales, while fixed selling and administration expenses are period costs.
The factory operates for 2,400 productive machine hours during the quarter, and its available practical capacity is 2,600 hours. All direct material and labour costs are included in the variable manufacturing cost. There is no abnormal scrap, work-in-progress or production loss. The company follows consistent inventory accounting policies, and there are no other over- or under-recovery adjustments. Management requires the predetermined fixed manufacturing overhead absorption rate, the amount of overhead under-absorbed, and the quarterly profit under both costing methods after the appropriate adjustment. The finance controller also wants to establish whether the two methods can report different profits when production and sales quantities are identical.
What is the predetermined fixed manufacturing overhead absorption rate per unit?
₹30 (correct answer)
₹31
₹29
₹36
Answer: A — ₹30
Explanation. Predetermined fixed manufacturing overhead rate = Budgeted fixed manufacturing overhead ÷ Budgeted normal production. = ₹3,60,000 ÷ 12,000 units = ₹30 per unit. Actual fixed overhead of ₹3,72,000 is not used to determine the predetermined rate. Option b uses actual overhead in the numerator, while option d incorrectly divides by sales or another activity base. The normal capacity specified in the question must be used.
Where it goes wrong. Calculating the predetermined absorption rate using actual fixed overhead instead of budgeted fixed overhead and normal production.
Question 10 · 2 marks · Chapter 14: Marginal Costing · hard
What amount of fixed manufacturing overhead is under-absorbed during the quarter?
₹3,72,000
₹12,000 (correct answer)
₹30,000
₹3,60,000
Answer: B — ₹12,000
Explanation. Fixed manufacturing overhead absorbed = 12,000 units × ₹30 = ₹3,60,000. Actual fixed manufacturing overhead incurred = ₹3,72,000. Under-absorption = Actual overhead − Absorbed overhead = ₹3,72,000 − ₹3,60,000 = ₹12,000. This amount is charged to the current-period profit and loss account. Option c results from using an incorrect absorption rate or production quantity.
Where it goes wrong. Reversing actual and absorbed overheads or confusing the predetermined rate with actual overhead per unit.
Question 11 · 2 marks · Chapter 14: Marginal Costing · medium
Calculate the quarterly profit under marginal costing.
₹6,60,000
₹7,20,000
₹6,48,000 (correct answer)
₹6,36,000
Answer: C — ₹6,48,000
Explanation. Sales = 12,000 × ₹240 = ₹28,80,000. Variable manufacturing cost = 12,000 × ₹130 = ₹15,60,000. Variable selling cost = 12,000 × ₹10 = ₹1,20,000. Contribution = ₹12,00,000. Deduct actual fixed manufacturing overhead of ₹3,72,000 and fixed administration and selling expenses of ₹1,80,000. Marginal costing profit = ₹6,48,000. Actual fixed manufacturing overhead must be charged in full.
Where it goes wrong. Using budgeted fixed manufacturing overhead instead of actual fixed manufacturing overhead while determining marginal costing profit.
Question 13 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. A manufacturer reports the following information for a period: opening finished goods inventory is nil, closing finished goods inventory is nil, and actual fixed manufacturing overhead is correctly absorbed. Which statement regarding profit under marginal costing and absorption costing is correct?
A manufacturer reports the following information for a period: opening finished goods inventory is nil, closing finished goods inventory is nil, and actual fixed manufacturing overhead is correctly absorbed. Which statement regarding profit under marginal costing and absorption costing is correct?
Both methods report equal profit. (correct answer)
Absorption costing profit is higher by the total fixed manufacturing overhead.
Marginal costing profit is higher by the total fixed manufacturing overhead.
Absorption costing profit is higher by the variable manufacturing cost of closing inventory.
Answer: A — Both methods report equal profit.
Explanation. When opening and closing inventories are both nil, no fixed manufacturing overhead is carried forward or released from inventory. All fixed manufacturing overhead incurred during the period is charged to the current period under both techniques, although the presentation differs. Therefore, profits under absorption costing and marginal costing are equal, assuming proper overhead recovery. The difference between the methods arises from the fixed manufacturing overhead included in inventory valuation, which is absent here.
Where it goes wrong. Assuming that absorption costing always reports higher profit because it includes fixed manufacturing overhead in product cost.
Question 14 · 2 marks · Chapter 14: Marginal Costing · hard
Scenario. A company produces 15,000 units and sells 12,000 units during a period. Fixed manufacturing overhead is absorbed at ₹16 per unit. Opening inventory is nil, and there is no under-absorption or over-absorption. By how much does absorption costing profit exceed marginal costing profit?
A company produces 15,000 units and sells 12,000 units during a period. Fixed manufacturing overhead is absorbed at ₹16 per unit. Opening inventory is nil, and there is no under-absorption or over-absorption. By how much does absorption costing profit exceed marginal costing profit?
₹32,000
₹48,000 (correct answer)
₹16,000
₹60,000
Answer: B — ₹48,000
Explanation. Closing inventory = Production − Sales = 15,000 − 12,000 = 3,000 units. Fixed manufacturing overhead carried forward in closing stock = 3,000 × ₹16 = ₹48,000. With no opening inventory, absorption costing profit exceeds marginal costing profit by ₹48,000. This occurs because the fixed manufacturing overhead included in unsold units is not charged to the current period's profit and loss account.
Where it goes wrong. Using the quantity sold rather than the closing inventory quantity to calculate deferred fixed overhead.
Question 15 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. Opening inventory comprises 4,000 units carrying fixed manufacturing overhead of ₹25 per unit. Closing inventory comprises 2,500 units carrying fixed manufacturing overhead of ₹30 per unit. What is the difference in profit under absorption and marginal costing?
Opening inventory comprises 4,000 units carrying fixed manufacturing overhead of ₹25 per unit. Closing inventory comprises 2,500 units carrying fixed manufacturing overhead of ₹30 per unit. What is the difference in profit under absorption and marginal costing?
Absorption costing profit is higher by ₹25,000.
Absorption costing profit is higher by ₹75,000.
Marginal costing profit is higher by ₹25,000. (correct answer)
Marginal costing profit is higher by ₹5,000.
Answer: C — Marginal costing profit is higher by ₹25,000.
Explanation. Opening stock fixed overhead = 4,000 × ₹25 = ₹1,00,000. Closing stock fixed overhead = 2,500 × ₹30 = ₹75,000. Difference = ₹75,000 − ₹1,00,000 = −₹25,000. Therefore, absorption costing profit is lower than marginal costing profit by ₹25,000. The opening inventory releases more fixed overhead into current cost of goods sold than the amount deferred in closing inventory.
Where it goes wrong. Applying one common overhead rate to opening and closing stock despite their different valuation rates.
Question 16 · 2 marks · Chapter 14: Marginal Costing · hard
Scenario. A company has 1,200 units in opening inventory and 1,200 units in closing inventory. The fixed manufacturing overhead component is ₹18 per unit in opening inventory and ₹22 per unit in closing inventory. What is the difference in reported profit?
A company has 1,200 units in opening inventory and 1,200 units in closing inventory. The fixed manufacturing overhead component is ₹18 per unit in opening inventory and ₹22 per unit in closing inventory. What is the difference in reported profit?
Marginal costing profit is higher by ₹4,800.
Both profits are equal because inventory quantities are identical.
Absorption costing profit is lower by ₹4,800.
Absorption costing profit is higher by ₹4,800. (correct answer)
Answer: D — Absorption costing profit is higher by ₹4,800.
Explanation. Opening inventory fixed overhead = 1,200 × ₹18 = ₹21,600. Closing inventory fixed overhead = 1,200 × ₹22 = ₹26,400. Difference = ₹26,400 − ₹21,600 = ₹4,800. Consequently, absorption costing profit is higher by ₹4,800. Equal inventory quantities do not necessarily result in equal profit because the fixed manufacturing overhead component in the opening and closing inventories may differ.
Where it goes wrong. Assuming that equal opening and closing inventory quantities always ensure equal profits under both methods.
Question 17 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. Opening inventory consists of 2,000 units carrying fixed manufacturing overhead of ₹30 per unit. Closing inventory consists of 3,000 units carrying fixed manufacturing overhead of ₹20 per unit. What will be the difference in profit under the two costing methods?
Opening inventory consists of 2,000 units carrying fixed manufacturing overhead of ₹30 per unit. Closing inventory consists of 3,000 units carrying fixed manufacturing overhead of ₹20 per unit. What will be the difference in profit under the two costing methods?
Both methods report equal profit. (correct answer)
Absorption costing profit is higher by ₹10,000.
Marginal costing profit is higher by ₹10,000.
Absorption costing profit is higher by ₹20,000.
Answer: A — Both methods report equal profit.
Explanation. Opening inventory fixed overhead = 2,000 × ₹30 = ₹60,000. Closing inventory fixed overhead = 3,000 × ₹20 = ₹60,000. The net change in fixed manufacturing overhead carried in inventory is nil. Therefore, absorption costing and marginal costing report equal profits, despite the difference in physical inventory quantities. The relevant comparison is the total fixed overhead component of inventory, not merely the number of units.
Where it goes wrong. Comparing inventory quantities alone without comparing the total fixed manufacturing overhead amounts embedded in them.
Question 18 · 2 marks · Chapter 14: Marginal Costing · hard
Scenario. A company has closing finished goods inventory of 1,800 units. The fixed manufacturing overhead absorption rate is ₹32 per unit. How much higher will the absorption-cost inventory valuation be compared with marginal-cost inventory valuation, assuming no opening inventory?
A company has closing finished goods inventory of 1,800 units. The fixed manufacturing overhead absorption rate is ₹32 per unit. How much higher will the absorption-cost inventory valuation be compared with marginal-cost inventory valuation, assuming no opening inventory?
₹32,000
₹57,600 (correct answer)
₹64,800
₹1,15,200
Answer: B — ₹57,600
Explanation. Under absorption costing, closing inventory includes fixed manufacturing overhead, whereas marginal-cost inventory excludes it. Additional inventory valuation = Closing units × Fixed manufacturing overhead per unit = 1,800 × ₹32 = ₹57,600. The total absorption-cost inventory would therefore exceed the marginal-cost inventory by ₹57,600. Option a understates the inventory quantity used, while option d includes an unrelated variable-cost component.
Where it goes wrong. Calculating total closing inventory value instead of the difference attributable exclusively to fixed manufacturing overhead.
Question 19 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. Marginal costing profit for a period is ₹4,20,000. Opening inventory contains fixed manufacturing overhead of ₹84,000 and closing inventory contains fixed manufacturing overhead of ₹1,26,000. What is the absorption costing profit?
Marginal costing profit for a period is ₹4,20,000. Opening inventory contains fixed manufacturing overhead of ₹84,000 and closing inventory contains fixed manufacturing overhead of ₹1,26,000. What is the absorption costing profit?
₹4,20,000
₹4,41,000
₹4,62,000 (correct answer)
₹5,04,000
Answer: C — ₹4,62,000
Explanation. Absorption profit = Marginal profit + Closing inventory fixed overhead − Opening inventory fixed overhead. Substitution: ₹4,20,000 + ₹1,26,000 − ₹84,000 = ₹4,62,000. Closing inventory carries forward ₹42,000 more fixed manufacturing overhead than the amount released from opening inventory. Thus, ₹42,000 is deferred from the current period and absorption profit is correspondingly higher.
Where it goes wrong. Adding the entire closing stock overhead without subtracting the opening stock overhead already charged to the current period.
Question 20 · 2 marks · Chapter 14: Marginal Costing · hard
Scenario. Absorption costing profit is ₹5,50,000. Opening inventory is 5,000 units and closing inventory is 3,500 units. The fixed manufacturing overhead component is ₹20 per unit in both inventories. Calculate marginal costing profit.
Absorption costing profit is ₹5,50,000. Opening inventory is 5,000 units and closing inventory is 3,500 units. The fixed manufacturing overhead component is ₹20 per unit in both inventories. Calculate marginal costing profit.
Question 21 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. Budgeted fixed manufacturing overhead is ₹5,40,000 for a normal production level of 27,000 units. Actual production is 25,000 units and actual fixed manufacturing overhead is ₹5,20,000. What is the amount of under-absorption or over-absorption?
Budgeted fixed manufacturing overhead is ₹5,40,000 for a normal production level of 27,000 units. Actual production is 25,000 units and actual fixed manufacturing overhead is ₹5,20,000. What is the amount of under-absorption or over-absorption?
₹20,000 under-absorbed (correct answer)
₹20,000 over-absorbed
₹40,000 under-absorbed
₹40,000 over-absorbed
Answer: A — ₹20,000 under-absorbed
Explanation. Predetermined fixed manufacturing overhead rate = ₹5,40,000 ÷ 27,000 = ₹20 per unit. Fixed overhead absorbed = 25,000 × ₹20 = ₹5,00,000. Actual overhead = ₹5,20,000. Under-absorption = ₹5,20,000 − ₹5,00,000 = ₹20,000. The actual overhead exceeds absorbed overhead, so the difference is under-absorbed and must be adjusted in the absorption costing profit statement.
Where it goes wrong. Using the budgeted overhead amount directly as absorbed overhead without multiplying the predetermined rate by actual production.
Question 22 · 2 marks · Chapter 14: Marginal Costing · hard
Scenario. A company's marginal costing profit is ₹6,50,000. Opening inventory is 2,000 units and closing inventory is 4,000 units. Fixed manufacturing overhead is ₹18 per unit in both inventories. Calculate absorption costing profit.
A company's marginal costing profit is ₹6,50,000. Opening inventory is 2,000 units and closing inventory is 4,000 units. Fixed manufacturing overhead is ₹18 per unit in both inventories. Calculate absorption costing profit.
₹6,14,000
₹6,86,000 (correct answer)
₹7,22,000
₹6,50,000
Answer: B — ₹6,86,000
Explanation. Opening inventory fixed overhead = 2,000 × ₹18 = ₹36,000. Closing inventory fixed overhead = 4,000 × ₹18 = ₹72,000. Net fixed overhead deferred = ₹72,000 − ₹36,000 = ₹36,000. Absorption costing profit = ₹6,50,000 + ₹36,000 = ₹6,86,000. The increase in inventory means a portion of current-period fixed manufacturing overhead is carried forward, causing absorption costing profit to be higher.
Where it goes wrong. Adding opening stock overhead to marginal profit instead of subtracting it during reconciliation.
Question 23 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. A company has budgeted fixed manufacturing overhead of ₹7,20,000 and normal production of 24,000 units. Opening inventory comprises 1,500 units valued at the same fixed overhead rate. Closing inventory comprises 2,400 units. Marginal costing profit is ₹6,73,000. What will be the absorption costing profit?
A company has budgeted fixed manufacturing overhead of ₹7,20,000 and normal production of 24,000 units. Opening inventory comprises 1,500 units valued at the same fixed overhead rate. Closing inventory comprises 2,400 units. Marginal costing profit is ₹6,73,000. What will be the absorption costing profit?
₹6,73,000
₹6,90,000
₹7,00,000 (correct answer)
₹7,27,000
Answer: C — ₹7,00,000
Explanation. Fixed manufacturing overhead rate = ₹7,20,000 ÷ 24,000 = ₹30 per unit. Opening inventory fixed overhead = 1,500 × ₹30 = ₹45,000. Closing inventory fixed overhead = 2,400 × ₹30 = ₹72,000. Net increase in fixed overhead carried in inventory = ₹27,000. Absorption profit = ₹6,73,000 + ₹27,000 = ₹7,00,000. The production and inventory difference results in a higher absorption-cost profit.
Where it goes wrong. Using total budgeted fixed manufacturing overhead instead of calculating the per-unit absorption rate.
Question 24 · 2 marks · Chapter 14: Marginal Costing · hard
Scenario. Absorption costing profit for the year is ₹7,80,000. Opening inventory comprises 2,500 units carrying fixed manufacturing overhead of ₹16 per unit. Closing inventory comprises 1,750 units carrying fixed manufacturing overhead at the same rate. Calculate marginal costing profit.
Absorption costing profit for the year is ₹7,80,000. Opening inventory comprises 2,500 units carrying fixed manufacturing overhead of ₹16 per unit. Closing inventory comprises 1,750 units carrying fixed manufacturing overhead at the same rate. Calculate marginal costing profit.
₹7,68,000
₹7,80,000
₹8,04,000
₹7,92,000 (correct answer)
Answer: D — ₹7,92,000
Explanation. Opening inventory fixed overhead = 2,500 × ₹16 = ₹40,000. Closing inventory fixed overhead = 1,750 × ₹16 = ₹28,000. Net decrease in inventory fixed overhead = ₹40,000 − ₹28,000 = ₹12,000. Absorption profit is therefore ₹12,000 lower than marginal profit. Marginal profit = ₹7,80,000 + ₹12,000 = ₹7,92,000. The opening stock fixed overhead released exceeds the amount carried forward in closing stock.
Where it goes wrong. Subtracting the opening inventory overhead from absorption profit when the objective is to derive marginal profit.
Question 25 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. A manufacturer produces 30,000 units and sells 27,000 units during the year. The following information is available:
| Particulars | Amount |
| Selling price per unit | ₹2,000 |
| Variable manufacturing cost per unit | ₹120 |
| Variable selling cost per unit | ₹10 |
| Fixed manufacturing overhead | ₹3,60,000 |
| Fixed administration and selling expenses | ₹9,00,000 |
| Fixed manufacturing overhead absorption rate | ₹12 per unit |
There is no opening inventory and no under-absorption or over-absorption. What is the profit under absorption costing?
A manufacturer produces 30,000 units and sells 27,000 units during the year. The following information is available:
| Particulars | Amount |
| Selling price per unit | ₹2,000 |
| Variable manufacturing cost per unit | ₹120 |
| Variable selling cost per unit | ₹10 |
| Fixed manufacturing overhead | ₹3,60,000 |
| Fixed administration and selling expenses | ₹9,00,000 |
| Fixed manufacturing overhead absorption rate | ₹12 per unit |
There is no opening inventory and no under-absorption or over-absorption. What is the profit under absorption costing?
₹6,66,000 (correct answer)
₹6,30,000
₹7,02,000
₹6,48,000
Answer: A — ₹6,66,000
Explanation. Sales = 27,000 × ₹2,000 = ₹54,00,000. Variable manufacturing cost of goods sold = 27,000 × ₹120 = ₹32,40,000. Fixed manufacturing overhead absorbed into sold units = 27,000 × ₹12 = ₹3,24,000. Add variable selling cost of ₹2,70,000 and fixed administration and selling expenses of ₹9,00,000. Total cost = ₹47,34,000, giving profit of ₹6,66,000. The remaining 3,000 units carry ₹36,000 fixed manufacturing overhead into closing inventory.
Where it goes wrong. Charging the entire fixed manufacturing overhead to current sales without deferring the amount included in closing inventory.
ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)
Questions people ask
What does this Chapter 14: Marginal Costing - Test 5 practice test cover?
This practice test carries 50 marks across 25 questions covering core costing principles, cost accounting standards, formulas, mathematical models, and practical ICAI case scenarios.
How many questions are there and what is the time limit?
There are 25 questions carrying 2 marks each, giving a maximum score of 50 marks in 60 minutes with no negative marking.
Which study material and syllabus apply to these questions?
Questions strictly reflect the official ICAI Study Material for CA Intermediate Paper 4 Cost and Management Accounting for the 2027 examination sessions.
Can I sit this test in both exam and practice modes?
Yes. Practice mode gives immediate answers with mathematical step-by-step workings and trap explanations after each question. Exam mode simulates actual exam conditions with a live timer and issues a downloadable performance certificate.
