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 $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.	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 = 15*260 = 3900

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

Sales		223250
Less: Variable cost
Direct material (235*135)	(31725)
Direct labour (235*345)	(81075)
Variable manufacturing overhead (235*30)	(7050)
Variable selling and administrative expenses (235*20)	(4700)	(124550)
Contribution margin		98700
Less: Fixed expenses
Fixed manufacturing overhead	(65000)
Fixed selling and administrative expenses	(25000)	(90000)
Net operating income		8700