Question

Ida Company produces a handcrafted musical instrument called a gamelan that is similar to a xylophone. The gamelans are sold for $990. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		240
Units sold		225
Units in ending inventory		15
Variable costs per unit:
Direct materials	$	120
Direct labor	$	330
Variable manufacturing overhead	$	50
Variable selling and administrative	$	25
Fixed costs:
Fixed manufacturing overhead	$	72,000
Fixed selling and administrative	$	27,000

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

Sales	$	222,750
Cost of goods sold		180,000
Gross margin		42,750
Selling and administrative expense		32,625
Net operating income	$	10,125

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. Fixed manufacturing overhead per unit = $72,000 / 240 units = $300

Units in ending inventory = 15

Fixed manufacturing cost included in ending inventory = $300 * 15 units = $4,500

2.

Income Statement using Variable Costing
Ida Company
	Amount ($)	Amount ($)
Sales ( 225 * $990)		222,750
Variable expenses:
Direct material (225 * $120)	27,000
Direct labor (225 * $330)	74,250
Variable manufacturing OH (225 * $50)	11,250
Variable selling and administrative (225 * $25)	5,625	118,125
Contribution Margin		104,625
Fixed Expenses:
Fixed manufacturing OH	72,000
Fixed selling and administrative	27,000	99,000
Operating Income		5,625