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 for $950. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		250
Units sold		235
Units in ending inventory		15
Variable costs per unit:
Direct materials	$	135
Direct labor	$	345
Variable manufacturing overhead	$	30
Variable selling and administrative	$	20
Fixed costs:
Fixed manufacturing overhead	$	65,000
Fixed selling and administrative	$	25,000

The absorption costing income statement prepared by the company’s accountant for last year appears below:

Sales	$	223,250
Cost of goods sold		180,950
Gross margin		42,300
Selling and administrative expense		29,700
Net operating income	$	12,600

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. Under absorption costing, how much fixed manufacturing overhead cost is included in the company's inventory at the end of last year?

Fixed manufacturing overhead included in ending inventory = (260*15)= 3900

2. Prepare an income statement for last year using variable costing.

Sales	223250
Less: Variable cost of goods sold (510*235)	(119850)
Less: Variable selling and administrative exp (235*20)	(4700)
Contribution margin	98700
Less: Fixed manufacturing overhead	(65000)
Less: FIxed selling and administrative exp	(25000)
Net operating income	8700