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 $910. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		300
Units sold		270
Units in ending inventory		30
Variable costs per unit:
Direct materials	$	140
Direct labor	$	350
Variable manufacturing overhead	$	35
Variable selling and administrative	$	15
Fixed costs:
Fixed manufacturing overhead	$	69,000
Fixed selling and administrative	$	26,000

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

Sales	$	245,700
Cost of goods sold		203,850
Gross margin		41,850
Selling and administrative expense		30,050
Net operating income	$	11,800

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

2. What is the amount of the difference in net operating income between the two costing methods?

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

• Fixed manufacturing overhead
• Fixed selling and administrative expenses
• Sales
• Units in beginning inventory
• Units in ending inventory
• Units produced
• Units sold
• Variable cost of goods sold
• Variable selling and administrative expenses

Answer 1

1]	Amount of fixed MOH included in the inventory = (69000/300)*30 =	$         6,900
2]	The amount of difference in NI = the amount of fixed MOH in inventory =	$         6,900
3]	VARIABLE COSTING INCOME STATEMENT
	Sales = 270*910 =		$    2,45,700
	Variable expenses:
	Direct materials = 270*140 =	$      37,800
	Direct labor = 270*350 =	$      94,500
	Variable MOH = 270*35 =	$         9,450
	Variable selling and administrative = 270*15 =	$         4,050
	Total variable expenses		$    1,45,800
	Contribution margin		$       99,900
	Fixed costs:
	Manufacturing overhead	$      69,000
	Selling and administrative overhead	$      26,000
	Total fixed costs		$       95,000
	Net operating income		$          4,900
	CHECK:
	NOI per absorption costing = NOI per variable costing+FOH in inventory = 4900+6900 =	$      11,800