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 265 Units in ending inventory 35 Variable costs per unit: Direct materials $ 115 Direct labor $ 325 Variable manufacturing overhead $ 45 Variable selling and administrative $ 20 Fixed costs: Fixed manufacturing overhead $ 72,000 Fixed selling and administrative $ 34,000 The absorption costing income statement prepared by the company’s accountant for last year appears below: Sales $ 241,150 Cost of goods sold 192,125 Gross margin 49,025 Selling and administrative expense 39,300 Net operating income $ 9,725 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

Answer:-1) Under Absorption costing, $4125 fixed manufacturing overhead cost is included in the company’s inventory at the end of last year.

Explanation- Fixed manufacturing overhead cost is included in the company’s inventory= Closing inventory* Unit fixed manufacturing overhead cost

= 35 units*$240 per unit

= $8400

Explanation-Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead

=$115+$325+$45+$240

= $725 per unit

Explanation- Unit fixed manufacturing overhead= fixed manufacturing overhead/No. of units produced

=$72000/300 units

=$240 per unit

2)-

IDA SIDHA KARYA COMPANY
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	265 units*$910 per unit		241150
Less:- Variable cost of goods sold (b)
Opening inventory
Add:- Variable cost of goods manufactured		145500
Direct materials	300 units*$115 per unit	34500
Direct labor	300 units*$325 per unit	97500
Variable manufacturing overhead	300 units*$45 per unit	13500
Variable cost of goods available for sale		145500
Less:- Closing inventory	35 units*$485 per unit	16975	128525
Gross contribution margin C= a-b			112625
Less:-Variable selling & administrative exp.	265 units*$20 per unit		5300
Contribution margin			107325
Less:- Fixed costs
Manufacturing overhead			72000
Selling & administrative exp.			34000
Net Income			1325

Explanation-

Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$115+$325+$45

= $485 per unit