Question

Ida Sidha Karya Company is a family-owned company located in the village of Gianyar 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 $854. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		21,000
Units sold		18,000
Units in ending inventory		3,000
Variable costs per unit:
Direct materials	$	140
Direct labor	$	470
Variable manufacturing overhead	$	61
Variable selling and administrative	$	21
Fixed costs:
Fixed manufacturing overhead	$	700,000
Fixed selling and administrative	$	460,000

Required:

1. Assume that the company uses absorption costing. Compute the unit product cost for one gamelan. (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

2. Assume that the company uses variable costing. Compute the unit product cost for one gamelan.

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Ida Sidha Karya Company is a family-owned company located in the village of Gianyar 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. 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.

Answer 1

Answer 1-1.
Calculation of Cost per Unit
Under Absorption Costing
	Amount
No. of Units Produced	21,000
Direct Material	140.00
Direct Labor	470.00
Variable MOH	61.00
Fixed MOH - $700,000 / 21,000 Units	33.33
Total Cost per Unit	704.33
Note: Selling and administrative expenses (both variable and fixed) are not relevant for the computation of unit product cost in both absorption costing & variable costing.
Answer 1-2.
Calculation of Cost per Unit
Under Variable Costing
	Amount
No. of Units Produced	21,000
Direct Material	140.00
Direct Labor	470.00
Variable MOH	61.00
Total Cost per Unit	671.00
Answer 2-1.
Fixed MOH - Per Unit = $65,000 / 250 Units
Fixed MOH - Per Unit = $260
Fixed MOH included in Ending Inventory = 20 Units X $260
Fixed MOH included in Ending Inventory = $5,200
Answer 2-2.
Calculation of Cost per Unit
Under Variable Costing
	Amount
No. of Units Produced	250
Direct Material	145.00
Direct Labor	365.00
Variable MOH	40.00
Total Cost per Unit	550.00
Income Statement
Under Variable Costing
Sales - 230 Units X $990		227,700.00
Cost of Goods Sold - 230 Units x $550		126,500.00
Manufacturing Margin		101,200.00
Variable - Selling & Admn. Exp. - 230 Units X $25		5,750.00
Contribition Margin		95,450.00
Fixed Expenses:
MOH	65,000.00
Selling & Admn. Expense	29,000.00	94,000.00
Net Operating Income		1,450.00