Question

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 $860. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		320
Units sold		285
Units in ending inventory		35
Variable costs per unit:
Direct materials	$	135
Direct labor	$	355
Variable manufacturing overhead	$	30
Variable selling and administrative	$	15
Fixed costs:
Fixed manufacturing overhead	$	64,000
Fixed selling and administrative	$	27,000

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

Sales	$	245,100
Cost of goods sold		205,200
Gross margin		39,900
Selling and administrative expense		31,275
Net operating income	$	8,625

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 included in the company's inventory = 64000/320*35= $7000
2
Sales		245100
Variable expenses:
Variable cost of goods sold	148200
Variable selling and administrative expenses	4275
Total Variable expenses		152475
Contribution margin		92625
Fixed expenses:
Fixed manufacturing overhead	64000
Fixed selling and administrative expenses	27000
Total Fixed expenses		91000
Net operating income(loss)		1625