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 $1,003. Selected data for the company’s operations last year follow: Units in beginning inventory 0 Units produced 25,000 Units sold 23,000 Units in ending inventory 2,000 Variable costs per unit: Direct materials $ 270 Direct labor $ 490 Variable manufacturing overhead $ 59 Variable selling and administrative $ 16 Fixed costs: Fixed manufacturing overhead $ 850,000 Fixed selling and administrative $ 590,000 Required: 1. Assume that the company uses absorption costing. Compute the unit product cost for one gamelan. (Round your intermediate calculations and final answer to the nearest whole dollar amount.) 2. Assume that the company uses variable costing. Compute the unit product cost for one gamelan.

Answer 1

1) Under Absorbtion costing method all the costs (variable and fixed) spent towards manufacturing the product are assigned basis the number of units product. However, the selling & administrative expenses are not included as these costs form part of cost of sales. Hence, the per unit cost of Gamelan can be calculated as below -

2) Under variable costing method, the fixed costs are not assigned while computing the per unit cost and the total of fixed costs is added as a single line to arrive the profitablitity. Hence, the per unit cost under variable costing would be the total of all variable costs i.e., $ 819 per unit as calculated above.