Question

Ida 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 $980. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		280
Units sold		265
Units in ending inventory		15
Variable costs per unit:
Direct materials	$	150
Direct labor	$	370
Variable manufacturing overhead	$	45
Variable selling and administrative	$	30
Fixed costs:
Fixed manufacturing overhead	$	70,000
Fixed selling and administrative	$	30,000

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

Sales	$	259,700
Cost of goods sold		215,975
Gross margin		43,725
Selling and administrative expense		37,950
Net operating income	$	5,775

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 ending inventory = 70000/280*15 = $3750

2) Income statement

Sales		259700
Less; Variable cost of goods sold
Direct material (265*150)	39750
Direct labor (265*370)	98050
variable manufacturing overhead	11925
Total variable cost of goods sold		149725
Manufacturing margin		109975
variable selling and administrative expense		7950
Contribution margin		102025
Fixed cost
Fixed manufacturing cost	70000
Fixed selling and administrative expense	30000
Total fixed cost		100000
Net operating income		2025