Question

Exercise 6-2 Variable Costing Income Statement; Explanation of Difference in Net Operating Income [LO6-2]

Ida Sidha Karya Company is a family-owned company located in the village of Glanyar 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.	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.

       

Answer 1

Solution:(1): Calculation of ending inventory consisting of fixed manufacturing overhead:

Particulars	Details
Total fixed manufacturing overhead	$64,000
Manufacturing overhead per unit(Fixed Manufacturing overhead ÷ units produced)	$200
Ending inventory	35 units
Fixed Manufacturing overhead for 35 units (200*35)	$7,000

Solution:(2): Income statement under Variable costing:

Particulars	Amount ($)	Amount ($)
Sales(860*285)		245,100
Variable Costs:
Direct Materials(135*285)	38,475
Direct labor(355*285)	101,175
Manufacturing overhead (30*285)	8,550
Selling and administrative expense (15*285)	4,275
Less: Total variable costs		(152,475)
Contribution margin		92,625
Fixed costs:
Manufacturing overhead	64,000
Selling and administrative expense	27,000
Less: Total fixed costs		(91,000)
Net Operating Income		1,625