Question

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 $893. Selected data for the company’s operations last year follow:

Units in beginning inventory      0

Units produced      14,000

Units sold      12,000

Units in ending inventory      2,000

Variable costs per unit:        

Direct materials      $ 150

Direct labor      $ 510

Variable manufacturing overhead      $ 47

Variable selling and administrative      $ 21

Fixed costs:        

Fixed manufacturing overhead      $ 640,000

Fixed selling and administrative      $ 770,000

Required:

1.  Assume that the company uses absorption costing. Compute the unit product cost for one gamelan.      

2.  Assume that the company uses variable costing. Compute the unit product cost for one gamelan.

Answer 1

Under absorption costing, variable and fixed cost is also considered for calculating unit production cost.

Calculate production cost under absorption costing as follows:

$$ \begin{array}{|l|r|} \hline \text { Particulars } & \text { Amount } \\ \hline \text { Direct materials } & \$ 150.00 \\ \hline \text { Direct labor } & \$ 510.00 \\ \hline \text { Variable manufacturing overhead } & \$ 47.00 \\ \hline \begin{array}{l} \text { Fixed manufacturing overheads } \\ \$ 640000 / 14000 \end{array} & \underline{\$ 45.71} \\ \hline \text { Absorption costing unit product co } & \underline{\$ 752.71} \\ \hline \end{array} $$

Therefore, the unit product cost is \(\$ 752.71\)

 

Under variable costing, only variable cost is considered for calculating unit production cost.

Calculate production cost under variable costing as follows:

$$ \begin{array}{|l|r|} \hline \text { Particulars } & \text { Amount } \\ \hline \text { Direct materials } & \$ 150.00 \\ \hline \text { Direct labor } & \$ 510.00 \\ \hline \text { Variable manufacturing overhead } & \$ 47.00 \\ \hline \text { Variable costing unit product cost } & \underline{\$ 707.00} \\ \hline \end{array} $$

Therefore, the unit product cost is \(\$ 707\)