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 230

Units in ending inventory 20

Variable costs per unit:

Direct materials $ 125

Direct labor $ 335

Variable manufacturing overhead $ 55

Variable selling and administrative $ 30

Fixed costs:

Fixed manufacturing overhead $ 75,000

Fixed selling and administrative $ 15,000

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

Sales $ 218,500

Cost of goods sold 187,450

Gross margin 31,050

Selling and administrative expense 21,900

Net operating income $ 9,150

Required:

1. Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period.

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

Answer 1

1. Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period.

Fixed manufacturing overhead cost deferred in inventory = 300*20 = 6000

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

Sales	218500
Less: Variable cost of goods sold (230*515)	(118450)
Less: Variable selling and administrative exp (230*30)	(6900)
Contribution margin	93150
Less: Fixed manufacturing overhead	(75000)
Less: Fixed selling and administrative expense	(15000)
Net operating income	3150