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 $980. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		280
Units sold		265
Units in ending inventory		15
Variable costs per unit:
Direct materials	$	150
Direct labor	$	370
Variable manufacturing overhead	$	45
Variable selling and administrative	$	30
Fixed costs:
Fixed manufacturing overhead	$	70,000
Fixed selling and administrative	$	30,000

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

Sales	$	259,700
Cost of goods sold		215,975
Gross margin		43,725
Selling and administrative expense		37,950
Net operating income	$	5,775

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.

Prepare an income statement for last year using variable costing.

Ida Sidha Karya Company
Variable Costing Income Statement
Sales		$259,700
Variable expenses:
Variable cost of goods sold	$149,725
Variable selling and administrative expense	7,950
		157,675
		102,025
		0
		$102,025

Answer 1

1
Fixed manufacturing overhead included in inventory	3750	=70000/280*15
2
Ida Sidha Karya Company
Variable Costing Income Statement
Sales		259700
Variable expenses:
Variable cost of goods sold	149725		=265*(150+370+45)
Variable selling and administrative expenses	7950		=265*30
		157675
Contribution margin		102025
Fixed expenses:
Fixed manufacturing overhead	70000
Fixed selling and administrative expenses	30000
		100000
Net operating income		2025