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SR Ltd makes finished good MP from raw material RP. Cost of MP is ₹27 per unit (material ₹12 + labour ₹8 + fixed overhead ₹7). Selling price of MP is ₹22 per unit; replacement cost of RP is ₹11.50 per unit. Closing stock: MP 4,200 units, RP 4,000 units. If RP were wrongly carried at its own cost of ₹12 instead of replacement cost, by how much would closing RP be overstated?
A₹4,000
B₹1,000
C₹2,000
D₹6,000
Answer & Solution
Correct answer: C. ₹2,000
1. Correct value = 4,000 units × ₹11.50 = ₹46,000.
2. Wrong value at cost = 4,000 units × ₹12 = ₹48,000.
3. Overstatement = ₹48,000 − ₹46,000 = ₹2,000.
_Source: ICAI BoS CA Intermediate Paper 1 (Advanced Accounting), Sept 2025 — Q.1(b), AS 2 Valuation of Inventories._
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