Question

2.

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 $990. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		240
Units sold		225
Units in ending inventory		15
Variable costs per unit:
Direct materials	$	120
Direct labor	$	330
Variable manufacturing overhead	$	50
Variable selling and administrative	$	25
Fixed costs:
Fixed manufacturing overhead	$	72,000
Fixed selling and administrative	$	27,000

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

Sales	$	222,750
Cost of goods sold		180,000
Gross margin		42,750
Selling and administrative expense		32,625
Net operating income	$	10,125

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.

3.

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

	Year 1			Year 2
Sales (@ $63 per unit)	$	1,197,000		$	1,827,000
Cost of goods sold (@ $32 per unit)		608,000			928,000
Gross margin		589,000			899,000
Selling and administrative expenses*		312,000			342,000
Net operating income	$	\277,000\		$	557,000

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

The company’s $32 unit product cost is computed as follows:

Direct materials	$	8
Direct labor		10
Variable manufacturing overhead		2
Fixed manufacturing overhead ($288,000 ÷ 24,000 units)		12
Absorption costing unit product cost	$	32

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	24,000	24,000
Units sold	19,000	29,000

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

2
1
Fixed manufacturing overhead cost included in the company's inventory = 72000/240*15= $4500
2
Variable costing Income Statement
Sales		222750
Variable expenses:
Variable cost of goods sold	112500		=225*(120+330+50)
Variable selling and administrative expenses	5625		=225*25
Total Variable expenses		118125
Contribution margin		104625
Fixed expenses:
Fixed manufacturing overhead	72000
Fixed selling and administrative expenses	27000
Total Fixed expenses		99000
Net operating income(loss)		5625
3
1
	Year 1	Year 2
Direct materials	8	8
Direct labor	10	10
Variable manufacturing overhead	2	2
Unit product cost	20	20
2
	Year 1	Year 2
Sales	1197000	1827000
Variable expenses:
Variable cost of goods sold	380000	580000
Variable selling and administrative expenses	57000	87000
Total Variable expenses	437000	667000
Contribution margin	760000	1160000
Fixed expenses:
Fixed manufacturing overhead	288000	288000
Fixed selling and administrative expenses	255000	255000
Total Fixed expenses	543000	543000
Net operating income(loss)	217000	617000
3
Variable costing net income	217000	617000
Add(deduct) fixed manufacturing overhead deferred in(released)	60000	(60000)
Absorption costing net operating income	277000	557000