Exercise 6-2 (Algo) Variable Costing Income Statement; Explanation of Difference in Net Operating Income [LO6-2] Ida...

Exercise 6-2 (Algo) Variable Costing Income Statement; Explanation of Difference in Net Operating Income [LO6-2]

Ida Company produces a handcrafted musical instrument called a gamelan that is similar to a xylophone. The gamelans are sold for $980. 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	$	140
Direct labor	$	360
Variable manufacturing overhead	$	35
Variable selling and administrative	$	20
Fixed costs:
Fixed manufacturing overhead	$	66,000
Fixed selling and administrative	$	28,000

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


Sales	$	220,500
Cost of goods sold		182,250
Gross margin		38,250
Selling and administrative expense		32,500
Net operating income	$	5,750

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.

Solutions

Expert Solution

Answer 1.

Fixed manufacturing overhead per unit = Fixed manufacturing overhead / Units produced
Fixed manufacturing overhead per unit = $66,000 / 240
Fixed manufacturing overhead per unit = $275

Fixed manufacturing overhead deferred in inventory = Fixed manufacturing overhead per unit * Units in ending inventory
Fixed manufacturing overhead deferred in inventory = $275 * 15
Fixed manufacturing overhead deferred in inventory = $4,125

Answer 2.

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
Unit product cost = $140 + $360 + $35
Unit product cost = $535

Variable cost of goods sold = Unit product cost * Units sold
Variable cost of goods sold = $535 * 225
Variable cost of goods sold = $120,375

Variable selling and administrative expenses = Variable selling and administrative expenses per unit * Units sold
Variable selling and administrative expenses = $20 * 225
Variable selling and administrative expenses = $4,500

ekkarill92 answered 1 year ago

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