Question

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

Units in beginning inventory		0
Units produced		300
Units sold		265
Units in ending inventory		35
Variable costs per unit:
Direct materials	$	115
Direct labor	$	325
Variable manufacturing overhead	$	45
Variable selling and administrative	$	20
Fixed costs:
Fixed manufacturing overhead	$	72,000
Fixed selling and administrative	$	34,000

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

Sales	$	241,150
Cost of goods sold		192,125
Gross margin		49,025
Selling and administrative expense		39,300
Net operating income	$	9,725

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. What is the amount of the difference in net operating income between the two costing methods?

Answer 1