Question

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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 $910. Selected data for the company's operations last year follow: ma 115 A Units in beginning inventory Units produced Units sold Units in ending inventory Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs: Fixed manufacturing overhead Fixed selling and administrative A A A $ 72,000 $ 34,000 The absorption costing income statement prepared by the company's accountant for last year appears below: Sales Cost of goods sold Gross margin Selling and administrative expense Net operating income $ 241,150 192,125 49,025 39,300 $ 9,725 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

1. Calculation of Amount of Fixed Manufacturing Overhead Cost included in Inventory: Total Fixed Manufacturing Overhead Total Number of Units Produced 72,000.00 300 Fixed Manufacturing Overhead Per Unit ($72000/300) 240.00 Ending Inventory Units = 35 Fixed Manufacturing Overhead Cost included in Ending Inventory = 35 Units x $240 = $8,400.00

2. Preparation of Income Statement under Variable Costing: Calculation of Unit Product Cost under Variable Costing: Direct Materials Direct Labor Variable Manufacturing Overheads Unit Product Cost AA 115.00 325.00 45.00 485.00 241,150.00 (128,525.00) 112,625.00 Income Statement Under Variable Costing : Sales Less: Cost of Goods Sold (265x$485) Gross Contribution Margin Less: Variable Selling & Administrative (265x$20) Contribution Margin Less: Fixed Costs: Manufacturing Overheads Selling & Administration Net Operating Income (5,300.00) 107,325.00 (72,000.00) (34,000.00) 1,325.00