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 $950. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		270
Units sold		235
Units in ending inventory		35
Variable costs per unit:
Direct materials	$	110
Direct labor	$	330
Variable manufacturing overhead	$	30
Variable selling and administrative	$	20
Fixed costs:
Fixed manufacturing overhead	$	81,000
Fixed selling and administrative	$	22,000

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

Sales	$	223,250
Cost of goods sold		180,950
Gross margin		42,300
Selling and administrative expense		26,700
Net operating income	$	15,600

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

1) Fixed manufacturing cost per unit = Total Fixed manufacturing OH/Units produced

= $81,000/270 units = $300 per unit

Fixed cost included in ending inventory = 35 units*$300 per unit = $10,500

2) Variable Costing Income Statement (Amounts in $)

Sales	223,250
Less: Variable cost of goods sold [235 units*($110+$330+$30)]	(110,450)
Less: Variable selling and administrative (235 units*$20)	(4,700)
Contribution Margin	108,100
Less: Fixed manufacturing Overhead	(81,000)
Less: Fixed selling and administrative	(22,000)
Net Income/(Loss)	5,100