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

Units in beginning inventory		0
Units produced		250
Units sold		230
Units in ending inventory		20
Variable costs per unit:
Direct materials	$	145
Direct labor	$	365
Variable manufacturing overhead	$	40
Variable selling and administrative	$	25
Fixed costs:
Fixed manufacturing overhead	$	65,000
Fixed selling and administrative	$	29,000

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

Sales	$	227,700
Cost of goods sold		186,300
Gross margin		41,400
Selling and administrative expense		34,750
Net operating income	$	6,650

Required:

1.	Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period.

       

2.	Prepare an income statement for the year using variable costing.

       

Answer 1

1)     TOTAL FIXED MANUFACTURING OVERHEAD IN ENDING INVENTORY :
Units in ending inventory * Fixed manufacturing overhead per unit
Units in ending inventory * Fixed manufacturing overhead / units produced
20 units * $ 65,000 / 250 units
20 units * $ 260 per unit
$ 5,200
2) PREPARE THE INCOME STATEMENT FOR THE YEAR USING VARIABLE COSTING :
IDI SIDHA KARYA COMPANY
VARIABLE COSTING INCOME STATEMENT
sales ( 230 units * $ 990 per unit )		$ 227,700
less: variable expenses
variable cost of goods sold ( see note 1 below )	$ 126,500
variable selling and administrative ( 230 units * $ 25 )	$ 5,750
Total variable expenses		( $132,250)
contribution margin		$ 95,450
less: fixed expenses :
Fixed manufacturing overhead ( given )	$ 65,000
Fixed selling and administrative ( given )	$ 29,000
Total Fixed expenses		( $ 94,000 )
NET OPERATING INCOME		$ 1,450
EXPLANATION :
note 1 :
calculate the variable cost of goods sold :
Direct materials ( 230 units * $ 145 )	$ 33,350
Direct labor ( 230 units * $ 365 )	$ 83,950
variable manufacturing overhead ( 230 units* $ 40 )	$ 9,200
variable cost of goods sold	$ 126,500