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 300 Units sold 270 Units in ending inventory 30 Variable costs per unit: Direct materials $ 140 Direct labor $ 350 Variable manufacturing overhead $ 35 Variable selling and administrative $ 15 Fixed costs: Fixed manufacturing overhead $ 69,000 Fixed selling and administrative $ 26,000 The absorption costing income statement prepared by the company’s accountant for last year appears below: Sales $ 245,700 Cost of goods sold 203,850 Gross margin 41,850 Selling and administrative expense 30,050 Net operating income $ 11,800

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

Ida Sidha Karya Company

1. Determination of the fixed manufacturing overhead cost included in the company’s inventory at the end of last year:

• Cost per unit under absorption costing is arrived at as follows,

Direct material                                   $140

Direct labor                                         $350

Variable manufacturing overhead      $35

Fixed manufacturing overhead           $230 ($69,000/300 units)

Total production cost per unit            $755

Ending Inventory = 15 units

Fixed manufacturing overhead in Ending inventory = 30 units x $230 = $6,900.

2. Income Statement under variable costing method:

Variable Costing Income Statement
	Units	Unit price/cost	Amount
Sales	270	$910	$245,700
variable cost of goods sold:
Beginning inventory	0	0	0
Direct materials	300	$140	$42,000
Direct labor	300	$350	$105,000
Variable overhead	300	$35	$10,500
Total variable cost		$525	$157,500
Cost of goods available for sale			$157,500
Less: Ending inventory	30		$15,750
variable cost of goods sold:			$141,750
Variable selling costs	270	$15	$4,050
Contribution margin			$99,900
Fixed costs:
Manufacturing overhead			$69,000
Fixed selling and administrative costs			$26,000
Net Income			$4,900

Difference in absorption costing net income and variable costing net income = $11,800 - $4,900 = $6,900

Deferral in the fixed overhead charged to the ending inventory – 30 units x $230 per unit = $6,900