Question

Ida Sidha Karya Company is a family-owned company located in the village of Glanyar 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 $850. Selected data for the company’s operations last year follow:

  

Units in beginning inventory		0
Units produced		250
Units sold		225
Units in ending inventory		25
Variable costs per unit:
Direct materials		$ 100
Direct labor		$ 320
Variable manufacturing overhead		$ 40
Variable selling and administrative		$ 20
Fixed costs:
Fixed manufacturing overhead		$ 60,000
Fixed selling and administrative		$ 20,000

  

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

1.

Computation of Unit Product Cost
	Absorption Costing
Direct Meterial	$                                100
Direct Labour	$                                320
Variable Manufactoring Overhead	$                                  40
Fixed Manufactoring Overhead ($60,000/250)	$                                240
Unit Product Cost	$                                700

2.

Computation of Unit Product Cost
	Variable Costing
Direct Meterial	$                       100
Direct Labour	$                       320
Variable Manufactoring Overhead	$                         40
Fixed Manufactoring Overhead ($60,000/250)
Unit Product Cost	$                       460

Notice that the fixed manufacturing overhead cost has not been included while computing the cost of one unit under variable costing system.

Selling and administrative expenses (both variable and fixed) are not relevant for the computation of unit product cost.