Question

Chapter 6, question 2

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 $920. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		275
Units sold		260
Units in ending inventory		15
Variable costs per unit:
Direct materials	$	110
Direct labor	$	320
Variable manufacturing overhead	$	40
Variable selling and administrative	$	15
Fixed costs:
Fixed manufacturing overhead	$	77,000
Fixed selling and administrative	$	33,000

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

Sales	$	239,200
Cost of goods sold		195,000
Gross margin		44,200
Selling and administrative expense		36,900
Net operating income	$	7,300

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

Calculation of fixed manufacturing cost per unit
Fixed manufacturing cost per unit = Fixed manufacturing overhead/Units produced
Fixed manufacturing cost per unit = 77,000/275
Fixed manufacturing cost per unit	$280
Fixed manufacturing cost included in inventory = Ending inventory*Fixed manufacturing cost per unit
Fixed manufacturing cost included in inventory = 15*$280
Fixed manufacturing cost included in inventory	$4,200
The fixed manufacturing cost included in inventory is $4,200
2
Variable costing income statement
Sales		$239,200
Less: Variable cost of goods sold	(110+320+40)*260	$122,200
Variable selling and administrative	15*260	$3,900
Contribution margin		$113,100
Less: Fixed expenses
Fixed manufacturing overhead	77000
Fixed selling and administrative	33000	$110,000
Net Income		$3,100