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 $990. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		240
Units sold		225
Units in ending inventory		15
Variable costs per unit:
Direct materials	$	120
Direct labor	$	330
Variable manufacturing overhead	$	50
Variable selling and administrative	$	25
Fixed costs:
Fixed manufacturing overhead	$	72,000
Fixed selling and administrative	$	27,000

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

Sales	$	222,750
Cost of goods sold		180,000
Gross margin		42,750
Selling and administrative expense		32,625
Net operating income	$	10,125

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. 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 included in company's ending inventory = 300*15=4500

2.Prepare an income statement for last year using variable costing.

Sales	222750
Less: Variable cost of goods sold (225*500)	(112500)
Less: Variable selling and administrative exp (225*25)	(5625)
Contribution margin	104625
Less: Fixed manufacturing overhead	(72000)
Less: Fixed selling and administrative exp	(27000)
Net operating income	5625