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 $910. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		310
Units sold		280
Units in ending inventory		30
Variable costs per unit:
Direct materials	$	130
Direct labor	$	350
Variable manufacturing overhead	$	50
Variable selling and administrative	$	40
Fixed costs:
Fixed manufacturing overhead	$	62,000
Fixed selling and administrative	$	26,000

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

Sales	$	254,800
Cost of goods sold		204,400
Gross margin		50,400
Selling and administrative expense		37,200
Net operating income	$	13,200

Required:

1. Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period.

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

Ida Sidha Karya Company
Variable Costing Income Statement
Variable expenses:
Fixed expenses:

Answer 1

1. Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period.

Fixed manufacturing overhead cost deferred in inventory = 62000/310*30 = 6000

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

Sales (910*280)		254800
Less: Variable expense
Direct material	36400
Direct labour	98000
Variable manufacturing overhead	14000
Variable selling and administrative	11200
Total variable expense		159600
Contribution margin		95200
Fixed cost
Fixed manufacturing overhead	62000
Fixed selling and administrative	26000
Total fixed cost		88000
Net operating income		7200