Question

Exercise 6-2 (Algo) Variable Costing Income Statement; Explanation of Difference in Net Operating Income [LO6-2]

Ida Company produces a handcrafted musical instrument called a gamelan that is similar to a xylophone. The gamelans are sold for $840. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		300
Units sold		275
Units in ending inventory		25
Variable costs per unit:
Direct materials	$	100
Direct labor	$	310
Variable manufacturing overhead	$	30
Variable selling and administrative	$	35
Fixed costs:
Fixed manufacturing overhead	$	66,000
Fixed selling and administrative	$	31,000

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

Sales	$	231,000
Cost of goods sold		181,500
Gross margin		49,500
Selling and administrative expense		40,625
Net operating income	$	8,875

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

Fixed manufacturing overhead per unit = 66,000/300 = 220

Fixed manufacturing overhead included in company's inventory at the year end = 220 * 25 units

= 5500

Sales (275*840)		231,000
Variable expenses :
Variable cost of goods sold (100+310+30)*275	121,000
Variable selling and administrative expenses (35*275)	9,625	130,625
Contribution margin		100,375
Fixed expenses
Fixed manufacturing overhead	66,000
Fixed selling and administrative expenses	31,000	97,000
Net operating income		3375