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 $822. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		14,000
Units sold		11,000
Units in ending inventory		3,000
Variable costs per unit:
Direct materials	$	100
Direct labour	$	480
Variable manufacturing overhead	$	53
Variable selling and administrative	$	21
Fixed costs:
Fixed manufacturing overhead	$	970,000
Fixed selling and administrative	$	420,000

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

Under absorption costing,
Direct Materials, Direct labour, Variable manufacturing overheads and Fixed manufacturing overheads
are considered as product costs.
Under variable costing,
Direct materials, Direct Labour and Variable Manufacturing overheads are considered as product costs.

1)

If the Company uses absorption costing, unit product cost is

	Unit cost
Direct materials	$100
Direct Labour	$480
Variable manufacturing overhead	$53
Fixed manufacturing Overhead ($970000/14000units)	$69.29
Total unit product cost	$702.29

2)	If the Company uses variable costing, unit product cost is

	Unit cost
Direct materials	$100
Direct Labour	$480
Variable manufacturing overhead	$53
Total unit product cost	$633