Question

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

Answer 1

1
Fixed manufacturing overhead cost included in inventory	6300	=63000/200*20
2a
Variable costing Income Statement
Sales		174600
Variable expenses:
Variable cost of goods sold	82800		=180*(130+300+30)
Variable selling and administrative expenses	2700		=180*15
		85500
Contribution margin		89100
Fixed expenses:
Fixed manufacturing overhead	63000
Fixed selling and administrative expenses	25000
		88000
Net operating income		1,100
2b
Amount of the difference in net Operating income	6300	=7,400-1,100