Question

da Sidha Karya Company is a family-owned company located 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 $950. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		250
Units sold		230
Units in ending inventory		20
Variable costs per unit:
Direct materials	$	125
Direct labor	$	335
Variable manufacturing overhead	$	55
Variable selling and administrative	$	30
Fixed costs:
Fixed manufacturing overhead	$	75,000
Fixed selling and administrative	$	15,000

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

Sales	$	218,500
Cost of goods sold		187,450
Gross margin		31,050
Selling and administrative expense		21,900
Net operating income	$	9,150

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

Ans. 1 Ending inventory units * (Fixed manufacturing overhead / Units produced) Fixed overhead in ending inventory 20 * ($75,000 / 250) 20 * $300 $6,000 Ans. 2 In variable costing method, the unit product cost is the sum of only variable manufacturing costs per unit Unit product cost under Variable Costing: Direct materials Direct labor Variable Overhead per unit Total production cost per unit $125 $335 $55 $515 Amount $218,500 Ida Sidha Karya Company Variable Costing Income Statement Particulars Sales (230 * $950) Less: Variable cost of goods sold: Opening inventory $0 Add: Variable cost of goods manufactured (250 * $515) $128,750 Variable cost of goods available for sale $128,750 Less: Ending inventory (20 * $515) $10,300 Variable cost of goods sold Gross Contribution Margin Less: Variable Selling and Administrative ($30 * 230) Contribution Margin Less: Fixed expenses: Fixed manufacturing overhead $75,000 Fixed selling and administrative expenses $15,000 Net operating income $118,450 $100,050 $6,900 $93,150 $90,000 $3,150

*Variable cost of goods manufactured = Units produced * Variable unit product cost
*Variable selling and administrative expenses = Units sold * Variable selling and administrative expenses per unit sold