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 $956. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		22,000
Units sold		19,000
Units in ending inventory		3,000
Variable costs per unit:
Direct materials	$	230
Direct labor	$	510
Variable manufacturing overhead	$	65
Variable selling and administrative	$	25
Fixed costs:
Fixed manufacturing overhead	$	900,000
Fixed selling and administrative	$	790,000

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.

1. Absorbtion Costing Unit Product Cost:

2. Variable Costing Unit Product Cost:

Answer 1

Absorption costing - the unit product cost for one unit
Direct materials	$230
Direct labor	$510
Variable manufacturing OH	$65
Fixed manufacturing OH/PU	$41	Fixed manufacturing OH ÷ Units Produced
Absorption CPU	$846
Variable costing - the unit product cost for one unit
Direct materials	$230
Direct labor	$510
Variable manufacturing OH	$65
Variable CPU	$805
Note that selling and administrative expenses are not treated as product costs under either absorption or variable costing.
These expenses are always treated as period costs and are charged against the current period’s revenue.