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 $960. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		230
Units sold		200
Units in ending inventory		30
Variable costs per unit:
Direct materials	$	110
Direct labor	$	320
Variable manufacturing overhead	$	30
Variable selling and administrative	$	10
Fixed costs:
Fixed manufacturing overhead	$	69,000
Fixed selling and administrative	$	27,000

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

Sales	$	192,000
Cost of goods sold		152,000
Gross margin		40,000
Selling and administrative expense		29,000
Net operating income	$	11,000

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. What is the amount of the difference in net operating income between the two costing methods

Answer 1