Question

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

Total fixed manufacturing overhead in ending inventory

       

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.

Total fixed manufacturing overhead in ending inventory = (70000/280)*15 = 3750

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

Ida Sidha Karya Company
Variable Costing Income Statement
Sales		259700
Variable expenses:
Direct material (150*265)	(39750)
Direct labour (370*265)	(98050)
Variable manufacturing overhead (45*265)	(11925)
Variable selling and administrative exp (30*265)	(7950)	(157675)
Contribution margin		102025
Fixed expenses:
Fixed manufacturing overhead	(70000)
Fixed selling and administrative	(30000)	(100000)
Net operating income		2025