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 $990. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		200
Units sold		180
Units in ending inventory		20
Variable costs per unit:
Direct materials	$	120
Direct labor	$	340
Variable manufacturing overhead	$	40
Variable selling and administrative	$	30
Fixed costs:
Fixed manufacturing overhead	$	56,000
Fixed selling and administrative	$	24,000

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

Sales	$	178,200
Cost of goods sold		140,400
Gross margin		37,800
Selling and administrative expense		29,400
Net operating income	$	8,400

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. Under absorption costing, how much fixed manufacturing overhead cost is included in the company's inventory at the end of last year

Fixed manufacturing overhead included in ending inventory = 56000/200*20 = $5600

2. Prepare an income statement for last year using variable costing.

Sales		178200
Less: Variable expense
Direct material (180*120)	21600
Direct labour (180*340)	61200
Variable manufacturing overhead (180*40)	7200
Variable selling and administrative (180*30)	5400
Total variable expense		95400
Contribution margin		82800
Less: Fixed cost
Fixed manufacturing overhead	56000
Fixed selling and administrative	24000
Total Fixed cost		80000
Net operating income		2800