Question

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

Units in beginning inventory		0
Units produced		200
Units sold		180
Units in ending inventory		20
Variable costs per unit:
Direct materials	$	130
Direct labor	$	300
Variable manufacturing overhead	$	30
Variable selling and administrative	$	15
Fixed costs:
Fixed manufacturing overhead	$	63,000
Fixed selling and administrative	$	25,000

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

Sales	$	174,600
Cost of goods sold		139,500
Gross margin		35,100
Selling and administrative expense		27,700
Net operating income	$	7,400

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.

2. During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:

	Year 1			Year 2
Sales (@ $62 per unit)	$	992,000		$	1,612,000
Cost of goods sold (@ $35 per unit)		560,000			910,000
Gross margin		432,000			702,000
Selling and administrative expenses*		303,000			333,000
Net operating income	$	\129,000\		$	369,000

* $3 per unit variable; $255,000 fixed each year.

The company’s $35 unit product cost is computed as follows:

Direct materials	$	6
Direct labor		8
Variable manufacturing overhead		2
Fixed manufacturing overhead ($399,000 ÷ 21,000 units)		19
Absorption costing unit product cost	$	35

Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.

Production and cost data for the first two years of operatons are:

	Year 1	Year 2
Units produced	21,000	21,000
Units sold	16,000	26,000

Required:

1. Using variable costing, what is the unit product cost for both years?

2. What is the variable costing net operating income in Year 1 and in Year 2?

3. Reconcile the absorption costing and the variable costing net operating income figures for each year.

Answer 1

1
Fixed manufacturing overhead cost included in the company's inventory = 63000/200*20= $6300
2
Sales		174600
Variable expenses:
Variable cost of goods sold	82800
Variable selling and administrative expenses	2700
Total Variable expenses		85500
Contribution margin		89100
Fixed expenses:
Fixed manufacturing overhead	63000
Fixed selling and administrative expenses	25000
Total Fixed expenses		88000
Net operating income(loss)		1100
2
1
	Year 1	Year 2
Direct materials	6	6
Direct labor	8	8
Variable manufacturing overhead	2	2
Variable costing unit product cost	16	16
2
	Year 1	Year 2
Sales	992000	1612000
Variable expenses:
Variable cost of goods sold	256000	416000
Variable selling and administrative expenses	48000	78000
Total Variable expenses	304000	494000
Contribution margin	688000	1118000
Fixed expenses:
Fixed manufacturing overhead	399000	399000
Fixed selling and administrative expenses	255000	255000
Total Fixed expenses	654000	654000
Net operating income(loss)	34000	464000
3
Variable costing net income	34000	464000
Add(deduct) fixed manufacturing overhead deferred in(released from) ending inventory	95000	-95000
Absorption costing net operating income	129000	369000