Question

Ida Sidha Karya Company is a family-owned company located in the village of Glanyar 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. Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period. 2. Prepare an income statement for the year using variable costing.

Answer 1

Calculation of closing inventory value
Particulars	Per unit	Remarks
Direct material	$120	Direct cost needs to be considered.
Direct labour	$330	Direct cost needs to be considered.
Variable manufacturing overhead	$50	Direct cost needs to be considered.
Variable selling and administrative		selling costs should not be considered for inventory value calculation
Fixed manufacturing overhead	$300	=$72000(fixed cost)/240(units produced). Since fixed overheads absorbed for the entire production
Fixed selling and administrative		selling costs should not be considered for inventory value calculation
Total inventory cost per unit under the absorption cost method	$800	since fixed manufacturing overhead cost deferred in inventory to the next period
No of units in closing stock	15	As per working note 1
Value of closing inventory	$12,000

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Income statement under variable cost method
Particulars	Units	Per unit	Amount in $	Remarks
Sales	225	$990	$2,22,750
Variable costs
Direct material	225	$120	$27,000
Direct labour	225	$330	$74,250
Variable manufacturing overhead	225	$50	$11,250
Variable selling and administrative	225	$25	$5,625
Total variable cost		$525	$1,18,125
Contribution		$465	$1,04,625
Fixed costs
Fixed manufacturing overhead			$67,500	total overheads $72000 - $4500 (overheads observed in closing inventory: $300 per unit * 14 closing stock)
Fixed selling and administrative			$27,000
Total fixed cost			$94,500
Net profit			$10,125

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working - 1 [closing stock units]
Particulars	Units
Opening stock	-
Produced	240
Sold	225
Closing stock	15