Question

Ida Company produces a handcrafted musical instrument called a gamelan that is similar to a xylophone. The gamelans are sold for $900. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		300
Units sold		275
Units in ending inventory		25
Variable costs per unit:
Direct materials	$	125
Direct labor	$	345
Variable manufacturing overhead	$	45
Variable selling and administrative	$	35
Fixed costs:
Fixed manufacturing overhead	$	63,000
Fixed selling and administrative	$	25,000

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

Sales	$	247,500
Cost of goods sold		199,375
Gross margin		48,125
Selling and administrative expense		34,625
Net operating income	$	13,500

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 deferred in ending inventory = (63000/300*25) = 5250

2) Income statement

Sales (275*900)		247500
Less: Variable cost of good sold (515*275)		141625
Manufacturing margin		105875
Less: Variable selling and administrative expense (275*35)		9625
Contribution margin		96250
Fixed cost
Fixed manufacturing overhead	63000
Fixed selling and administrative expense	25000
Total fixed cost		88000
Net income		8250