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 $880. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		280
Units sold		240
Units in ending inventory		40
Variable costs per unit:
Direct materials	$	115
Direct labor	$	335
Variable manufacturing overhead	$	35
Variable selling and administrative	$	25
Fixed costs:
Fixed manufacturing overhead	$	63,000
Fixed selling and administrative	$	23,000

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

Sales	$	211,200
Cost of goods sold		170,400
Gross margin		40,800
Selling and administrative expense		29,000
Net operating income	$	11,800

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 overhead cost included in inventory	9000	=63000/280*40
2
Variable costing Income Statement
Sales		211200
Variable expenses:
Variable cost of goods sold	116400		=240*(115+335+35)
Variable selling and administrative expenses	6000		=240*25
		122400
Contribution margin		88800
Fixed expenses:
Fixed manufacturing overhead	63000
Fixed selling and administrative expenses	23000
		86000
Net operating income		2800