Question

Exercise 7-2 Variable Costing Income Statement; Explanation of Difference in Net Operating Income [LO7-2]

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 $850. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		250
Units sold		225
Units in ending inventory		25
Variable costs per unit:
Direct materials	$	100
Direct labor	$	320
Variable manufacturing overhead	$	40
Variable selling and administrative	$	20
Fixed costs:
Fixed manufacturing overhead	$	60,000
Fixed selling and administrative	$	20,000

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

Sales	$	191,250
Cost of goods sold		157,500
Gross margin		33,750
Selling and administrative expense		24,500
Net operating income	$	9,250

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