Question

Karya company is a family-owned firm located in Indonesia. The company produces a single product that is a handcrafted musical instrument called gamelan which similar to a xylophone. The following data for periods 1 to 4 are given below: f Direct materials per unit 100 Direct labor per unit 150 Variable non-manufacturing overhead per 50 unit Selling price per unit Budgeted fixed manufacturing overhead per period 550 60,000 Normal activity budgeted activity is 5,000 units and actual production and sales for the or four periods (1-4) are as follows: Sales (units) Production (units) Period 1 5,000 5,000 Period 2 4,000 5,000 Period 3 5,500 4,500 Period 4 4,500 5,000

Questions: 1) Determine the product (inventoriable) cost per unit under: a) Absorption costing [1 mark] b) Variable costing. [1 mark]

2) Prepare the statement of profit and loss for periods 1-4 under absorption costing by using the gross margin approach. [12 marks]

3) Prepare the statement of profit and loss for periods 1-4 under variable costing by using the contribution margin approach. [12 marks]

4) Reconcile the absorption and variable costing operating profit figures for each period and explain the differences in the operating profits resulting from the use of the two costing methods. [5 marks]

Answer 1

total sales = 19,000 unit

total production = 19500

total fixed cost = 240,000

( 60,000*4 )

1)

product cost

absorption method

material	100
labor	150
variable overhead	50
fixed overhead	12.30
product cost	312.30

fixed cost per unit = total fixed cost / total production

240000 / 19500 = 12.30

fixed cost per unit = 12.30

variable costing

material	100
labor	150
variable overhead	50
product cost	300

product cost = 300 /

2)

absorption costing

period 1

sales 5000 * 550		2750000
production 5000 * 312	1560000
gross profit		1,190,000

fixed cost = 60000 / 5000 = 12

product cost = 12+100+150+50 = 312

period 2

sales 4000 * 550		2200000
product cost 312 * 5000	1560000
ending inventory 312 * 1000	312000
gross profit		952000

period 3

sales 5500 * 550		3025000
beginning inventory 312 *1000	312000
production 4500 * 313.33	1,410,000
gross profit		1303000

fixed cost = 60000 / 4500 = 13.33

period 4

sales 4500 * 550		2475000
production 5000 * 312	1560000
ending inventory 312 * 500	156000
gross profit		1071000

total gross profit = 1071000 +1303000+952000+1190000 = 4516000

3 ) variable costing

period 1

sales 5000 * 550		2750000
production 5000 * 300	1500000
contribution		1250000
fixed cost	60000
operating profit		1190000

period 2

sales 4000 * 550		2200000
production 5000 * 300	1500000
ending inventory 1000 * 300	300000
contribution		1,000,000
fixed cost	60000
operating income		940000

period 3

sales 5500 *550		3025000
beginning inventory 1000 * 300	300000
production 4500 * 300	1350000
contribution		1375000
fixed cost	60,000
operating income		1315000

period 4

sales 4500 * 550		2475000
production 5000 * 300	1500000
ending inventory 500 * 300	150000
contribution		1125000
fixed cost	60000
operating income		1065000

total operating income = 1065000 + 1315000+ 940000+1190000 = 4510000

total calculation (another method)

sales 19000 * 550		10,450,000
production 19500 * 300	5,850,000
ending inventory 500 * 300	150,000
contribution		4,750,000
fixed cost ( 60,000 * 4 )	240,000
operating income		4,510,000

5) Explanation of the difference in net operating income:

Under variable costing, the fixed manufacturing overhead cost is not included in the product cost but charged to the income statement of the relevant period in its entirety. Therefore no portion of fixed cost is absorbed by the ending inventory.

under absorption costing ; the ending inventory absorbs a portion of fixed manufacturing overhead and reduces the burden of the current period. In this way a portion of fixed cost that relates to the current period is transferred to the next period

	operating income
production = sales	absorption = variable costing
production > sales	absorption >variable costing
production < sales	absorption<variable costing