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

Required: 1. Under absorption costing, how much fixed manufacturing overhead cost is included in the company's inventory at the end of last year?

Fixed manufacturing overhead cost included in ending inventory = 63000/280*40 = $9000

2) Prepare income statement under variable costing :

Sales (240*880)		211200
Less: Variable Expense
Variable cost of goods sold (240*485)		116400
Manufacturing margin		94800
Less: Variable selling and administrative expense (240*25)		6000
Contribution margin		88800
Less; Fixed expense
Fixed manufacturing overhead	63000
Fixed selling and administrative expense	23000
Total Fixed expense		86000
Net operating income		2800