Question

Ida Sidha Karya Company is a family-owned company located in the village of Glanyar 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: 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 35 15 $ 69,000 $ 26,000 The absorption costing income statement prepared by the company's accountant for last year appears below: Sales Cost of goods sold $ 245,700 203,850 Gross margin Selling and administrative expense 41,850 30,050 Net operating income $ 11,800 Required: 1. Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period. Total fixed manufacturing overhead in ending inventory

Answer 1

Under variable costing, only variable manufacturing costs are part of product costs.
Under absorption costing, fixed and variable manufacturing costs are part of product costs.
1.
Calculation of fixed manufacturing overhead in ending inventory
Fixed manufacturing overhead per unit	$230.00	69000/300
No of units in ending inventory	30	(300-270)
Fixed manufacturing overhead deferred	$6,900.00	230*30
Thus, ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period of $6,900.
2.
Income statement using variable costing is shown below
Ida Sidha Karya Company
Sales (270*910)		$245,700
Variable expenses:
Direct materials (270*140)	$37,800
Direct labor (270*350)	$94,500
Variable manufacturing overhead (270*35)	$9,450
Variable selling and administrative (270*15)	$4,050	$145,800
Contribution margin		$99,900
Fixed expenses:
Fixed manufacturing overhead	$69,000
Fixed selling and administrative	$26,000
Total fixed expenses		$95,000
Operating income		$4,900