Question

Ida Company produces a handcrafted musical instrument called a gamelan that is similar to a xylophone. The gamelans are sold for $990. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		240
Units sold		225
Units in ending inventory		15
Variable costs per unit:
Direct materials	$	120
Direct labor	$	330
Variable manufacturing overhead	$	50
Variable selling and administrative	$	25
Fixed costs:
Fixed manufacturing overhead	$	72,000
Fixed selling and administrative	$	27,000

The absorption costing income statement prepared by the company’s accountant for last year appears below:

Sales	$	222,750
Cost of goods sold		180,000
Gross margin		42,750
Selling and administrative expense		32,625
Net operating income	$	10,125

Required:

1. Under absorption costing, how much fixed manufacturing overhead cost is included in the company's inventory at the end of last year?

2. Prepare an income statement for last year using variable costing.

Answer 1

Fixed Manufacturing over head coat included in inventory $4,500 Calculation: fixed Manufacturing over head cost included in inventory = (Units in ending inventory & fixed manufacturing Overhead per unit) fixed Manufacturing overhead per unit = (fixed manufacturing overhead & Units Produced) $72,000 & 240 units = $300 per unit Fixed manufacturing over thead cost included in inventory 15 units X $300 per unit $ 4,500

$222,750 Ida Sidha Karya Company Variable Costing Income statement Sales les: Variable expenses. Variable cost of goods sold $ 112,500 Variable pelling and administaative ex pense $ 5,625 $ 118, 125 Contribution Margin $ 104, 625 Less: fixed expenses: fixed manufacturing over head $72,000 Fixed selling and administratie "expense $ 27,000 $ 99,000 Net operating Income $ 5,625 Calculation; Variable cost of goods sold = (Units sold & Variable cost per unit) Variable cost per unit =(Direct materials per unit & Direct labor per unit & variable manufacturing overhead per unit) ($ 120 + $330 + $ 50) = $500 Variable cost of goods sold 225 units X $500 $ 112,500 variable selling and administrative expenses = (Units sold x Variable selling and administrative) 225 units X $25 = $5,625