Question

Ida Sidha Karya Company is a family-owned company located 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 $880. Selected data for the company’s operations last year follow:

Units in beginning inventory 0

Units produced 280

Units sold 255

Units in ending inventory 25

Variable costs per unit:

Direct materials $ 105

Direct labor $ 315

Variable manufacturing overhead $ 35

Variable selling and administrative $ 40

Fixed costs:

Fixed manufacturing overhead $ 63,000

Fixed selling and administrative $ 32,000

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

Sales $ 224,400

Cost of goods sold 173,400

Gross margin 51,000

Selling and administrative expense 42,200

Net operating income $ 8,800

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. What is the amount of the difference in net operating income between the two costing methods?

Answer 1

1. inventory included in the company's inventory at end of last year under absorption costing;

=>fixed manufacturing overhead * units in ending inventory / units produced

=>$63,000*25/280

=>$5,625.

2. Income statement using variable costing;

sales	224,400
less; variable costs ($35+40+105+315)*255 sold	(126,255)
contribution margin	98,175
less; fixed costs (63,000+32,000)	(95,000)
net income	3,175

Difference between net income = 8800-3175=>$5,625.

This amount is the amount of fixed overhead in ending inventory.