Question

Ida Company produces a handcrafted 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

Solution

1.fixed manufacturing overhead cost is included in the company's inventory at the end of last year

=( Fixed manufacturing overhead/ units produced)*units in the ending inventory

= (64000/320)*35

= 7000

2. Unit Product cost under variable Costing

= Direct material + direct labor +variable manufacturing overhead

=135+355+30

=520

Variable Costing income statement

Particulars	amount	amount
Sales (320*860)		275,200
Less variable Expenses
Cost of goods sold(320*520)	166400
Variable selling and administrative cost(320*15)	4800
Total variable Expenses		171200
Total contribution margin		104000
Fixed manufacturing overhead	64000
Fixed selling and administrative expenses	27000
Total fixed expenses		91000
Net operating income ( loss)		13000