Question

Ida Sidha Karya Company is a family-owned company located in the village of Gianyar on the island of Bali in Indonesia. The company produces a handcrafted Balinese musical instrument called a gamelan that is similar to a xylophone. The gamelans are sold for $850. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		250
Units sold		225
Units in ending inventory		25
Variable costs per unit:
Direct materials		$    100
Direct labor		$    320
Variable manufacturing overhead		$     40
Variable selling and administrative		$     20
Fixed costs:
Fixed manufacturing overhead		$ 60,000
Fixed selling and administrative		$ 20,000

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

Sales	$	191,250
Cost of goods sold		157,500
Gross margin		33,750
Selling and administrative expense		24,500
Net operating income	$	9,250

Required:

1. Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period.

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

Answer 1

Answer 1.

Fixed manufacturing overhead per unit = Fixed manufacturing overhead / Units produced
Fixed manufacturing overhead per unit = $60,000 / 250
Fixed manufacturing overhead per unit = $240

Fixed manufacturing overhead deferred in inventory = Fixed manufacturing overhead per unit * Units in ending inventory
Fixed manufacturing overhead deferred in inventory = $240 * 25
Fixed manufacturing overhead deferred in inventory = $6,000

Answer 2.

$ 191,250 Ida Sidha Karya Company Variable Costing Income Statement Sales Variable Expenses: Variable Cost of Goods Sold $ 103,500 Variable Selling and Administrative Expenses $ 4,500 Total Variable Expenses Contribution Margin Fixed Expenses: Fixed Manufacturing Overhead $ 60,000 Fixed Selling and Administrative Expenses $ 20,000 Total Fixed Expenses Net Operating Income $ $ 108,000 83,250 80,000 3,250

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
Unit product cost = $100 + $320 + $40
Unit product cost = $460

Variable cost of goods sold = Unit product cost * Units sold
Variable cost of goods sold = $460 * 225
Variable cost of goods sold = $103,500

Variable selling and administrative expenses = Variable selling and administrative expenses per unit * Units sold
Variable selling and administrative expenses = $20 * 225
Variable selling and administrative expenses = $4,500