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 $840. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		300
Units sold		275
Units in ending inventory		25
Variable costs per unit:
Direct materials	$	100
Direct labor	$	310
Variable manufacturing overhead	$	30
Variable selling and administrative	$	35
Fixed costs:
Fixed manufacturing overhead	$	66,000
Fixed selling and administrative	$	31,000

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

Sales	$	231,000
Cost of goods sold		181,500
Gross margin		49,500
Selling and administrative expense		40,625
Net operating income	$	8,875

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

Answer 1 fixed manufacturing overhead cost is included inventory at the end = $5500

Calculated as

Fixed manufacturing cost = 66000

Units produced = 300

Cost per unit of Fixed manufacturing overhead = $66000/300 = $220 per unit

Fixed overhead included in closing inventory = $220 x 25 = $5500

Answer 2

Income Statement
Variable Costing
Sale=840*275	$       2,31,000
Less: Variable Cost of Goods sold
=275*475	$       1,30,625
Contribution	$       1,00,375
Less: Fixed Cost
Fixed manufacturing overhead	$           66,000
Fixed selling and administrative	$           31,000
Net Income	$             3,375

Difference between net income between two costing method is =$8875-$3375 = $5500

Workings for above answer

Variable Calculation of cost of goods sold
Direct materials		$        100
Direct labor		$        310
Variable manufacturing overhead		$          30
Variable selling and administrative		35
Cost of Goods sold per unit		$        475

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