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 to a Canadian importer for $773. Selected data for the company’s operations last year follow:

Units in beginning inventory 0

Units produced 14,000

Units sold 12,000

Units in ending inventory 2,000

Variable costs per unit:

Direct materials $ 120

Direct labour $ 390

Variable manufacturing overhead $ 54

Variable selling and administrative $ 22

Fixed costs:

Fixed manufacturing overhead $ 960,000

Fixed selling and administrative $ 770,000

Required:

1. Assume that the company uses absorption costing. Compute the unit product cost for one gamelan.

2. Assume that the company uses variable costing. Compute the unit product cost for one gamelan.

Answer 1

Answer to Part 1. Ida Sidha Karya Company Absorption Costing Income Statement Sales Cost of Goods sold Gross Margin Selling and Administrative Expenses Net Operating Income (Loss) Total 9,276,000 7,590,840 1,685,160 1,034,000 651,160

Calculation:
Sales = 12,000 * $773 = $9,276,000

Fixed Manufacturing Overhead per unit = Fixed Manufacturing Overhead / Units produced
Fixed Manufacturing Overhead per unit = $960,000 / 14,000
Fixed Manufacturing Overhead per unit = $68.57

Unit Product Cost = Direct Materials + Direct Labour + Variable Manufacturing Overhead + Fixed Manufacturing Overhead
Unit Product Cost = $120 + $390 + $54 + $68.57
Unit Product Cost = $632.57

Cost of Goods sold = Unit Product Cost * Units Sold
Cost of Goods sold = $632.57 * 12,000
Cost of Goods sold = $7,590,840

Selling and Administrative Expenses = $770,000 + ($22 * 12,000)
Selling and Administrative Expenses = $1,034,000

9,276,000 Answer to Part 2. Ida Sidha Karya Company Variable Costing Income Statement Sales Variable Expenses: Variable Cost of Goods sold Variable Selling and Administrative Expenses Total Variable Expenses Contribution Margin Fixed Expenses: Fixed Manufacturing Overhead Fixed Selling and Administrative Expenses Total Fixed Expenses Net Operating Income 6,768,000 264,000 7,032,000 2,244,000 960,000 770,000 1,730,000 514,000 Calculation: Sales = 12,000 * $773 = $9,276,000 Product Cost using Variable Costing = $120 + $390 + $54 Product Cost using Variable Costing = $564 Variable Cost of Goods sold = $564 * 12,000 = $6,768,000 Variable Selling and Administrative Expenses = $22 * 12,000 = $264,000