Question

Ida Sidha Karya Company is a family-owned company located 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 $970. Selected data for the company’s operations last year follow: Units in beginning inventory 0 Units produced 200 Units sold 180 Units in ending inventory 20 Variable costs per unit: Direct materials $ 130 Direct labor $ 300 Variable manufacturing overhead $ 30 Variable selling and administrative $ 15 Fixed costs: Fixed manufacturing overhead $ 63,000 Fixed selling and administrative $ 25,000 The absorption costing income statement prepared by the company’s accountant for last year appears below: Sales $ 174,600 Cost of goods sold 139,500 Gross margin 35,100 Selling and administrative expense 27,700 Net operating income $ 7,400 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

Under absorption costing, how much fixed manufacturing overhead cost is included in the company's inventory at the end of last year?

no of units produced =200

Fixed manufacturing overhead $ 63,000

fixed overhead absorbtion rate =$63000/200 =$315

fixed manufacturing overhead cost is included in the company's inventory = 20 units X 315 =$6300

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

Variable costing Income statement
Sales		174600
Variable Expenses
Variable Selling and Adminstrative expense	2700
Variable Cost of goods sold (130+300+30)*180	82800	85500
Contrbution Margin		89100
Fixed Expense
Fixed Manufacturing overhead	63000
Fixed Selling and admin expenses	25000	88000
Net operating Income		1100